Investment FAQs

What is a convertible note?

A Convertible Note (or simply "Note") is a way for a company to raise money that takes the form of a short-term loan, but with the intention that it will be converted into equity in the company at some specified future event, generally a later round of funding.

Do I have to make monthly principal & interest payments?

No. There are no repayments due until the note matures in 3 years, or until the company is sold, or raises further equity.

What happens at the end of the 3 years?

If the company has not been sold or raised further equity, you may be required to repay the principal and all accrued interest. If repayment is required, but the cash to repay is not available, the IDA will support other options at that time.

What if the company raises money from other investors during the 3 year period?

The Note with the IDA may convert into Equity at that time at a valuation 20% lower than that determined by the new investors.

Example: Company raises $10,000 at a valuation of $3m. The IDA may convert its Note (and interest) into Equity at a valuation of $2.4m (80% of $3m).

Who or what determines whether and when the IDA's Note will convert into Equity?

If the raise is "large" (or "Qualified" defined by the formula below), then the conversion is automatic. If the raise is "small," then the IDA will have the option to either keep the Note as is, or convert the Note into Equity at a valuation 20% lower than that determined by the new investors.

How large does a raise have to be before it is considered as "Qualified"?

A raise is "large" (or Qualified) if the amount raised is greater than 20% of the valuation of the company at that time.

Example 1: The company raises $500,000 at a valuation of $2m. This is "Qualified" as $500k/$2m is 25%, and so greater than the 20% limit. The Note will convert into Equity automatically.

Example 2: The company raises $500,000 at a valuation of $3m. This is NOT "Qualified" as $500k/$3m is 17%, and so less than the 20% limit. The IDA will have the option to hold the Note, or convert into Equity.

How much of my company will the IDA own?

The % ownership that the IDA will hold cannot be determined today, but will be determined by the timing and valuation of the next round. This can best be explained by using an example.

Let's say your next round of funding happens exactly one year after the Note is issued, and you raise $1m of new funding at a pre-money valuation of $3m. The "post money" valuation is therefore $4m ($3m pre + $1m new money), and the new equity holders will own 25% of the company ($1m/$4m). Please note that in "shark tank" language, this is the same as saying "I'll give you $1m for 25% of your company".

The face value of the IDA Note at that point is $25k + 1 year's interest at 3% for a total of $25,750. The Note carries a 20% discount, meaning that it converts at a value 20% lower than the new investors, so compared to the new investors, their Note is worth $32,188 ($25,750/0.8), and this would equate to an ownership of 0.8% ($32,188/$4m).

To be 100% accurate, you should analyze this in terms of the number for shares issued & held, but this quick example gets you to a similar place.

What if the company is sold to someone else during the 3 year period?

The Company will pay the IDA 1.5 times the principal and accumulated interest.

Example: Loan amount $25,000. Interest 3%. Company sale occurs 12 months after the Note was signed.

Total amount due: $38,625. Comprised of 1.5 times [$25,000 + $750 interest (3% of $25k)].