For convertible note bridge financing deals, the conversion provision is usually the main feature of the deal. Let’s assume an angel investor invests $500,000 in exchange for a convertible note. This conversion provision basically says that upon the later Series A Preferred Stock Financing, the note that the angel investor received for investing $500,000 would convert into Series A Preferred Stock on substantially the same terms as the venture capital investors. The whole point of an angel investor doing the convertible bridge financing is to have his note convert to preferred stock – going from debt to equity. However, to reward the angel investors for putting in his $500,000 earlier, when the circumstances were much riskier, the angel investors will get a discount on the conversion price. For example, if the Series A investors are purchasing the shares at $1.00 per share, there will be some discount given to the angel investors upon conversion. The typical numbers I see in most deals involve discounts ranging from 15% to 25%.
Here’s what it may look like:
In the event the Company consummates, prior to the Maturity Date (as defined below), an equity financing pursuant to which it sells shares of its Preferred Stock (the “Preferred Stock”) with an aggregate sales price of not less than $1,500,000, excluding any and all convertible bridge notes which are converted into preferred stock (including the Notes issued under the Note Purchase Agreement), and with the principal purpose of raising capital (a “Qualified Financing”), then the Note shall automatically convert all principal and accrued interest under the Note into Preferred Stock. The Note shall convert into shares of Preferred Stock on the same terms as the other investors purchasing the Preferred Stock in the Qualified Financing other than with respect to the conversion into the Preferred Stock shall be at a 20% discount (the “Conversion Price”).