This effectively means the convertible noteholder gets double the number of shares for the same price as investors in the Series A funding round to due to the valuation cap. The THB 10 million convertible debt financing has allowed them to raise the value of the company to THB 200 million at the Series A equity funding round. A valuation cap on the note ensures the loan noteholder receives potentially a larger portion of equity at qualified funding rounds as compensation for investing early in the business compared to those investing at qualified funding rounds.įollowing from the example above, say Company A issues convertible notes stipulating a valuation cap at THB 100 million. This means that the share value for loan noteholder s (i.e., the conversion price of a loan note) will be based on the company’s valuation cap stated in the convertible loan agreement rather than the company value at a qualified funding round. ![]() ![]() This is known as “uncapped convertible note”.Ĭapped convertible notes recognise that early investors are taking large risks investing in companies going through strong growth or early in the business’ life, especially when taking into consideration that funding from the convertible loans can be used to create a much more valuable company when share prices are determined. Investor B now has the right to convert the principal plus accrued interest (THB 10m plus THB 1.2m interest) into shares at a 20% discount to the share value offered at the equity funding round. Company A enters Series A equity funding, a qualified funding round, 18 months following the convertible notes issue. The convertible loan contract stipulates that in this situation, Investor B can receive shares at a 20% discount of the share value offered in a qualified funding round. Investor B agrees to fund this through a THB 10 million convertible loan at 8% annual interest over 24 months. The difference being that should the investee offer equity for subsequent funding (known as a Qualified Financing round when investment exceeds a certain threshold) before the maturity date, the convertible noteholder can convert the loan into equity shares in the investee, normally at a discounted rate.Īn example would be that Company A has landed a very large contract and requires THB 10 million funding for expansion and manpower to meet the terms of the contract. Like other forms of debts, the loan note has interest and a maturity date. ![]() ![]() Recently Thai law has recognised that a hybrid method of financing, very regularly used in more liberalised markets like Singapore, is required to increase the flow of investment into SMEs and listed companies alike, ready for explosive growth.Ĭonvertible debt financing is one such method.Ĭonvertible debt (also known as convertible notes) is a loan provided by an investor that can be converted to equity, either at a specific date or once contractual milestones have been reached. Commonly, many ask friends and family others acquire debt from institutions that have rights at liquidation before the owners some may opt for offering ownership of a portion of their company to fund this growth, otherwise known as equity financing. Back Convertible Debt as an Alternative to Equity Financing Mar 17, 2022įrom aspiring business empire builders to those with ideas that could revolutionise an industry, funding growth can be a sticking point.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |