Episode 9

S2, Episode 9: Negotiating Convertible Note Term Sheets

Season Two: Episode Nine — An overview of convertible notes, including key provisions, mechanisms for conversion, and negotiation strategy.

Episode Description:  Elizabeth Ostaszewski (Fordham Law ‘19) and Christie Yeh (Fordham Law ‘19) interview Seth Helfgott (Fordham Law ‘09), Partner at Wilson Sonsini in San Francisco, to discuss convertible notes — the  most common way to raise modest amounts of capital from venture capital firms at the seed stage.

Episode Roadmap:

  • [:30] Elizabeth Ostaszewski and Christie Yeh introduce themselves and their guest Seth Helfgott and offer an overview of venture capital financing and convertible notes.
  • [7:20] What terms should a borrower look for and what details should they focus on when obtaining a convertible note? 
  • [11:23] Convertible note negotiations and the role of the valuation cap.
  • [17:10] Discount rates and their ideal percentages. 
  • [19:23] How exactly do convertible notes convert?  An overview of the three most common mechanisms for conversion.
  • [21:39] General terms that are considered non-negotiable by venture capitalists and the provisions that startups need to fight for.
  • [27:09] Who controls amendments to convertible notes? 
  • [28:49] Understanding West Coast vs. East Coast convertible note negotiations and the new SAFE agreement. 
  • [30:59] Seth’s career advice for both entrepreneurs and lawyers.

Tweetables:

“Companies don’t need to focus too much on building out a financial model at this point — most venture capitalists recognize it’s really just guessing at this early stage.” — Seth Helfgott

“You need to think about the size of the round that you are raising now and the size of the round you expect to raise before these notes convert.” — Seth Helfgott

“Historically East Coast is more investor friendly and West Coast tends to be more company favorable.” — Seth Helfgott

“Value your time — don’t do it for free — but there are plenty of pro-bono opportunities to get involved in.” — Seth Helfgott

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Startup LAWnchpad is the podcast that educates entrepreneurs about forming, growing and protecting a startup. Startup LAWnchpad is produced by the Entrepreneurial Law Clinic at Fordham University School of Law in New York City.