Convertible Debt Instruments

 

Convertible debt is a loan, like a debenture, that can be turned into equity by an investor at some point in the future. The conversion usually occurs  upon the occurrence of a milestone event, usually surrounding a follow on up-round financing. Convertible debt is commonly used to attract savvy start-up investors because the debt is not based upon a company’s current valuation, but the future prospects of the business.

Most companies and investors usually choose a financing event, a particular business milestone being achieved or a point when revenue or cash flow has reached a particular threshold. The conversion event and pricing structure is negotiated by the company’s management and existing shareholders. The specific time period in which the conversion will occur is also negotiate and defined at that time. The conversion ratio measures the number of shares of common stock the investor will receive upon conversion of the debt. The conversion ratio is always set at the issuance of the convertible instrument.

shadowed-money-finalThe investor often receives a discount on the shares they receive when the conversion occurs. Share discounts are usually determined by the level of risk, being assumed by the investors and the life cycle of the business. Convertible debt is very popular with start ups and small businesses, but the process can complicated and requires an attorney, intermediary and/or a certified public accountant (CPA) who is knowledgeable about the process to explain and help handle the transaction.

HFS has extensive experience with these types of financing’s  and can be a valuable asset to clients who may be interested in securing and structuring a convertible debt instrument. CONTACT US today for a free consultation.