These are the most common terms that an entrepreneur can find in a converted loan, at least based on what we experienced with Credo Ventures. When we talk about the transformation of a convertible, we usually mean two slogans: “discount” and “cap.” A discount is relatively simple: the processing price is calculated by deducting the agreed discount (if any) from the share price paid during the series of shares or the exit transaction during which the conversion takes place. Convertible bonds are also increasingly used during the start-up phase. There is a lot of criticism of this practice of VCs, especially when the notes are overused and contain harsh terms. I recommend reading this piece by Mark Suster on the subject. 16. Applicable law – This loan agreement (and all transactions, documents, instruments or other agreements in this loan agreement) is interpreted and governed exclusively by the laws and laws of Canada in quebec, and the courts of Quebec (and, if applicable, the Supreme Court of Canada) are exclusively intended to adjudicate all related disputes. The undersigned irrevocably agrees with the jurisdiction of these courts and accepts the opening of proceedings before these courts. However, this provision is not construed as affecting the investor`s right to apply an arbitral judgment or award outside that province, including the right to register and apply a judgment or award in another jurisdiction. A converted loan is a loan that is either repaid or, in most cases, converted into equity at a later date. These loans are a form of financing that typically takes less time than a capital financing cycle (which can be both costly and time-consuming). As has already been said, a converted loan is a short-term debt converted into equity. As a rule, it is transformed in the next investment cycle.
For example, if you get your initial capital investment in the form of a converted loan, it will be converted into equity if you increase your Series A investment. Security – The Corporation`s loan commitments under this loan agreement take precedence over all other corporate debts. Lack of governance (in the event that the convertible is used as the first unqualified financing) is therefore seen by most convertible investors as a necessary evil that they accept, either to put a foot in the door in a competitive financing situation or if there is enough confidence in the founders not to “spoil things” before the loan is converted. All of this is clearly subject to a relatively short period of time before the investor can repay or convert (in the absence of equity financing). Convertible investors who are not yet shareholders generally require a relatively short duration of 6 to 12 months and, in rare cases, 18 months. It is therefore customary to refer, when setting the ceiling, to an assessment of the whole transaction and not to a price per share. If this value is defined as a “post-currency” (which, in our experience with ordinary convertible bonds, is still rare, but was introduced in the “Simple Agreement for Future Equity (SAFE)” standard after a recent change, often used in the United States instead of a traditional change), it will provide the investor (lender) with a guarantee on the (percentage) of its share in the conversion: if the investor invests about 1 million euros for a post-monetary ceiling of 10 million euros, he knows that his share before dilution by the shares issued during the financing cycle will be at least 10% (EUR 1 million/10 million EUROS). From a technical point of view, this is done by incorporating the issued shares with all other convertible investors into the definition of “fully diluted shares” used to calculate the processing price.