We're happy to announce that our FrontFundr Campaign is now live!
You can learn more here.
We've had a few people reaching out to us with questions about our FrontFundr campaign and the convertible note we are offering with it. We've put together this blog post to answer some of those questions.
We are offering a convertible note with a 3 year term, 6% interest, a 15% discount, and a $7.5M Cap. Read on for more information on each of these deal terms.
What is a convertible note? (From Seedinvest)
A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company.
The primary advantage of issuing converitble notes is that it does not force the issuer and investors to determine the value of the company when there really might not be much to base a valuation on. That valuation will usually be determined during the Series A financing, when there are more data points off which to base a valuation.
Why are you offering a convertible note instead of a straight equity offering?We’re still a very young company.
While we’ve had incredible growth in our first year (and a huge pent up demand for our products) there isn’t enough data to properly put together a valuation.
What is the 3 year term?
This is the length of the note. After 3 years, your note will convert to equity in the company based on the deal terms. It’s possible for the note to convert before this 3 year term if we raise a significant funding round of $2M or more (this is likely to happen).
What is 6% interest? (from Seedinvest)
Since you are lending money to a company, convertible notes will more often than not accrue interest as well. However, as opposed to being paid back in cash, this interest accrues to the principal invested, increasing the number of shares issued upon conversion.
What does a 15% discount mean? (from Seedinvest)
This represents the valuation discount you receive relative to investors in the subsequent financing round, which compensates you for the additional risk you bore by investing earlier.
What does the $7.5M cap mean? (from Seedinvest)
The valuation cap is an additional reward for bearing risk earlier on. It effectively caps the price at which your notes will convert into equity and—in a way—provides convertible note holders with equity-like upside if the company takes off out of the gate.
Below are a few potential scenarios.
You invest $10,000
In 1-2 years we raise a funding round (likely a Series A). That round values us at $10M. Your investment will convert at a $7.5M valuation.
Your $10,000 will be worth $11,910 (with the interest) it will then convert at the cap ($7.5M)
At the companies value of $10M your investment will be worth $15,880.
We raise a funding round that values us at $5M.
Your $10,000 will be worth $11,910 (with the interest) and then it will convert at a $4,250,000 valuation (with the 15% discount)
At the companies value of $5M your investment will be worth $14,011.
From there, as the company grows and increases in value, so to will your investment. Based on Scenario 1, for every $1M increase in the companies value your investment will be worth $1,413 more.
Return on Investment
There are a number of different ways for you to see a return on your investment, I’ve outlined a few potential scenarios below.
Remaining Privately Owned
We build a sustainable and profitable company and decide to keep growing this way. We implement a dividend program and investors are paid out dividends.
Another company likes what we are doing and wants to acquire us.
This is something we’re open to but it would have to be a good fit both culturally and ethically.
IPO (Initial Public Offering)
We take the company public on the stock market.
You can then sell your shares as you see fit.
I hope this has been a useful overview of our convertible note offering.
Please feel free to reach out to me directly (email@example.com) if you would like to discuss further or setup a call to go over everything.
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