Convertible Note Fundraising Documents

Posted by Kyle Redinger on Mar 26, 2014 8:13:00 AM


Fundraising can present a formidable challenge for new entrepreneurs in early stage startups. To simplify early stage fundraising, accept the market for money. Terms shouldn’t limit an investor’s interest in you; the focus should be on you and the idea.

I wanted to provide the same documents we used for fundraising to the startup community with a few notes. Hopefully this makes it easier for entrepreneurs to raise money without having to deal with the hassle and confusion associated with term sheets and how to structure a raise.

The Market for Money

The market for money can best be understood by example. So, when we raised money, these are the things that we considered.

  • Early stage investors want to know how much of something they own.
  • You don’t want to give early stage investors a company valuation because you might be worth more in the future.
  • You both agree to wait to decide how much they owe until a “Qualified Financing” to set the price in the future. This event typically would be lead by a larger investor.
  • For waiting to know how much their investment is worth, the investors want something extra. They usually get a discount on the purchase, a minimal amount of ownership, and interest that accrues.
  • Investors also want to create an incentive for you to kick ass. So, if you can’t raise a “Qualified Financing” by a certain period of time, they take more ownership in the company.

Why Convertible Notes

When we raised our very first round, a convertible note made the most sense because it embodies the above thinking. Investors understand it. It’s much cheaper, from a legal and complexity standpoint, than an equity purchase. We only had to negotiate a few numbers, because we asked around to see what other people were doing. That was it. There was no discussion regarding the above bullets. Why? Because it’s the market that most people understand.

The Convertible Note Documents

Please note, we are not lawyers, you use these documents at your own risk, this is not legal advice, and you should still hire a lawyer with startup fundraising experience, but we highly suggest you consider these documents. They made it easy for us.

Convertible Note Term Sheet

Convertible Note

Convertible Note Purchase Agreement

A Note on Convertible Equity (pun intended)

Most of the fundraising advice comes from biased investors, or from the latest internet trend, so beware. Just remember that the terms, investors, and legal folks generally don’t move as fast as technology and startups. Maybe convertible equity will become the ‘new’ standard term sheet for early stage investments, but the market still has to decide if more lenient terms for the startup makes sense. From what we’ve seen, the market is still a convertible note even though convertible equity looks promising.

If you are interested in learning more, I will be speaking at Velocity in Santa Clara on this topic.

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