Overview of Convertible Note Offerings

What is a convertible note?

The word "convertible" is derived from a Latin word meaning "transform," and that's fitting. For thousands of startups, convertible notes have provided access to the capital necessary to transform their vision into reality.

A convertible note is a short-term debt owed by a startup founder to an investor that converts debt into equity. The “note” is the debt borrowed by the founder during the first round of funding. The “convertible” nature of the note means that it converts from a debt owed into equity for the investor upon the closing of the first round of financing.

The flexibility inherent in convertible promissory notes is a means of expanding the pie, and creates more avenues through which the parties may reach a mutually-agreeable arrangement governing the lender’s investment in the debtor’s business.

Convertible notes have become the gold standard by which early-stage startups raise capital. Most seed money is given in exchange for a percentage of the company, based on its estimated sale value. But convertible notes allow both parties to put off the valuation discussion for another time, without giving away huge shares of the business right out of the gate.

For example, instead of getting a 10% share in the company, with an estimated value of $1 million, the investor might agree to shares of preferred stock with special rights for the next round of funding—such as a 20% discount on future shares.

There are a few main benefits to this type of investing:

  • Faster, simpler, and cheaper than traditionally priced rounds
  • Postpone company valuations, stock options, and tax implications until metrics are available
  • Share a discounted rate with early investors for second-round funding
  • Allow shareholders to convert their investment into equity at a more favorable price per share

Three documents are crucial, which combined embody the final binding transaction containing the terms contemplated by the lender and the debtor:

  • Convertible Debt Term Sheet: A practical tool that can aid the parties’ shared goal of coming to a “meeting of the minds.” This non-enforceable sheet simplifies into layman’s terms the legalese represented in the convertible promissory note and convertible note purchase agreement.
  • Convertible Promissory Note: The means by which the lender may either enforce its right to be paid back by the debtor or convert the debt into equity, as dictated by the terms to which the parties agreed and the context present at the time of such repayment or conversion.
  • Convertible Note Purchase Agreement: This document articulates the conditions by which the transaction will close and the representations made by the parties for regulatory purposes.

In short, yes.

The convertible promissory note and the convertible note purchase agreement are complex and important legal documents that embody the final binding transaction containing the terms contemplated by the lender and the debtor. If improperly written, they can leave you vulnerable to financial loss, lawsuits, regulatory action, and more.

The convertible debt term sheet, meanwhile, is a simple manifestation of the terms to be discussed and negotiated between the lender and the debtor. It’s an unenforceable document used as a negotiation tool to facilitate the parties’ discussion of the most important terms of their agreement in plain language before reducing those terms to legalese.

All three documents are very long and detailed. You and your investors both benefit when they are clearly, concisely, and knowledgeably written. Writing these documents from scratch isn't a job for amateurs. That leaves most startups with two options: Hire an expensive lawyer or business consultant, or find pre-written documents (like those we sell here at BizNation) and customize them.

Fees vary, of course, but the general range for initial drafting of a convertible note is about $4,000–$8,000. Attorney review of convertible debt term sheet, convertible promissory note, and convertible note purchase agreement is around an additional $1,500–$3,000.

There is no hard and fast answer to this question, but typical time frames are as follows:

  • Initial drafting of convertible debt term sheet: 1–2 weeks
  • Initial drafting of convertible promissory note and purchase agreement: 1–2 months
  • Attorney review of all documents: 1–2 months

We were once a startup ourselves, so we know that every penny of your capital is precious. That's why we've priced our products well below what you'd pay for a consultant or attorney. We've structured our plans for even greater savings. See for yourself here.

We believe our convertible note document generation platform is superior for three key reasons:

  1. Our documents are proven in the marketplace. We've been providing startups like yours with well-written, easy-to-use, and affordable convertible note generation software since 2017. The documents generated by our platform have helped raise millions of dollars for many successful startups.
  2. Our documents are written and edited by experienced business attorneys. We combine up-to-the-minute industry knowledge with remarkably clear, concise, well-organized writing to produce thorough documents that protect your interests and help you communicate clearly with your investors.
  3. Our document generation platform is simple to use. With interactive features like "Toggle Guide," Q&A lists to prompt your thinking about your capital raise, and more, our documents provide detailed instructions that make it easy to correctly customize them for your business.

About BizNation

Where is BizNation based?

We are based in the U.S., in Kirkland, Washington—just east of Seattle.

BizNation is a wholly-owned subsidiary of Schatz Mallory Holding, Inc. We've provided consulting, software, and document templates to startups and franchisors since 2003.

Our convertible note software is appropriate for any kind of startup. We’ve created three different product levels to cater to first-time entrepreneurs, experienced venture capitalists, and seasoned professionals in the legal and financial industries. Our goal is to help you easily and quickly create binding convertible promissory notes and convertible note purchase agreements, and easy-to-understand convertible debt term sheets.

Our company is directed by Michael J. Schatz.

As a seasoned entrepreneur and online marketer, Michael knows how to take companies from napkin to crackin because he’s done it himself—six times over. What he has learned about raising capital through convertible note offerings for his own startups, he now shares with clients of BizNation.