Traditionally, when raising capital, an overwhelming majority of businesses have used Rule 506 of Regulation D, also often known as the “private placement exemption” as their exemption from securities registration requirements. In recent years, Congress, the SEC, and state regulators have enacted a number of alternative exemptions designed to make capital formation easier for growing businesses, such as equity crowdfunding and “mini-IPOs,” as well as made refinements to existing exemptions, such as Rule 147 (intrastate offerings) and Rule 504. In this post, I’ll provide an overview of these newer options. [Read more…]
Convertible Equity Options for Startups: SAFEs and KISSes
When it comes to raising capital to get your new business off the ground, there’s a range of investment structures available, from common stock to exchangeable shares. One of the newer and most popular forms of financing for startups is convertible equity.
When raising an angel or seed round of financing, many startups increasingly opt to offer investors some form of convertible equity rather than more-traditional convertible notes, which require the company to repay the investment plus interest if the company is unable to raise future rounds. Convertible equity, on the other hand, removes the stress of possible repayment with interest, and gives the company the potential of starting out free of significant debt. [Read more…]
Negotiating a Convertible Note Financing
A convertible note is a hybrid of debt and equity, and it’s a popular form of financing for two main reasons. First, convertible notes are generally easy and cost-effective, because they require little negotiation and paperwork. Second, they allow the parties to put off valuation until a later time, which is useful, because accurately valuing a new company from the outset can be difficult.
Before you venture into a convertible note financing, it’s important to have a strong grasp of the terms of the note and how it will convert to equity.