Convertible Notes - Part II - Common Terms of Convertible Notes

Common Terms of Convertible Notes

Now that we have discussed the two common approaches to issuing convertible notes to noteholders, we take time to review the terms commonly negotiated in the issuance of convertible notes.

Primary Terms

The terms of convertible notes commonly negotiated between the issuer and noteholder can be divided up into two categories. The first category, referred to here as the 'Primary Terms' are of paramount importance as they set the economic terms of the convertible notes. These terms are:

  1. Principal Amount
  2. Interest Rate
  3. Term
  4. Discount
  5. Valuation Cap

Secondary Terms

The second category, referred to here as the 'Secondary Terms' are also of serious importance, but do not deal with the economic terms of the convertible notes in their issuance. They relate to the conversion of the convertible notes and other non-monetary terms. These terms are usually  dependent on on regional custom, investor concerns, and willingness of the issuer to offer certain concessions or benefits to its investors to incentivize or reward investment. This list is fluid, but for the moment we consider:

  1. Manner of Conversion
  2. Corporate Transaction Multiples
  3. Subordination
  4. Secured vs. Non-Secured

In addition to these two tiers of consideration, an issuer may consider offering additional benefits or rights to certain investors through a side-letter.

Convertible Notes - Part I - The Types of Convertible Notes