Startup Funding Espresso - Deal Structures
Today, we\u2019ll talk about the deal structure you should use for your fundraise. There\u2019s equity, and then there are convertible notes and SAFE notes. If you want a straight loan, then you should use a promissory note. Equity agreements set the valuation for the company and various terms of governance, preferences, voting rights and more. A convertible note is debt that is intended to convert to equity. A convertible note has three terms: the interest rate, discount rate, and cap rate. The interest rate is how much interest is earned while the investment is in the note form. The interest is not paid out but rather accumulated and converted to equity later. The discount rate is how many additional shares the holder will receive when it converts to equity. The convertible note holder came in early to the deal and should receive more than those who come later. Finally, there\u2019s the cap rate which determines how the note converts to equity. The conversion will depend on the valuation set in the next round. SAFE notes are similar to convertible notes, but often leave out one or more of the key terms. Convertible notes typically convert on a timeframe such as 3 to 5 years or on an event such as a major equity funding. Thank you for joining us for the Startup Espresso. Let\u2019s go startup something today!