Disqus - Latest Comments for Yokum

Re: The Truth About Convertible Debt at Startups and The Hidden Terms You Didn’t Understand

Yokum — Fri, 07 Sep 2012 00:10:28 -0000

Hi Mark - great post. One tweak to convertible debt that is floating out there is the concept that the note be converted into both preferred stock and common stock. The original principal amount (and simple interest) gets converted into preferred at the same price as the cash investors in the round. The remaining number of shares that needs to be issued (or the discount element) is converted into common stock. This was a tweak that is in the form of convertible equity documents that Adeo released and is in the current form of note that YC companies use.

My previous thoughts about this type of tweak are in this post.

http://www.startupcompanyla...

Re: What is convertible equity (or a convertible security)?

Yokum — Mon, 03 Sep 2012 20:34:02 -0000

According to a 409A valuation firm, they really don't look at the debt element of a convertible note to reach a valuation conclusion. So I don't think that there would be any effect from a 409A valuation perspective.

Re: What is convertible equity (or a convertible security)?

Yokum — Mon, 03 Sep 2012 20:32:04 -0000

The concept is that the convertible security is a contract -- like a warrant. I am considering including an optional conversion into common stock at the price cap upon a true liquidation.

Re: What is convertible equity (or a convertible security)?

Yokum — Sat, 01 Sep 2012 22:07:13 -0000

@Dave McClure - In response to your Quora comment, I tweaked the form of term sheet to provide for some alternative language. Like I said in the body of the post, I'm not particularly wedded to any particular form -- I just want the repayment and interest provision to be eliminated. I agree that the better of 2x money back or conversion at the price cap in a change of control is a fairly common term in typical Silicon Valley convertible debt.

On info and pro rata rights, my general attitude is that if an investor wants it (and no one else asks or cares) -- we can provide it in a side letter. Once again, I wouldn't object to those things -- the provisions that 500S typically asks for are reasonable requests in my opinions.

Re: What is convertible equity (or a convertible security)?

Yokum — Sat, 01 Sep 2012 21:38:05 -0000

1. A company option to force conversion into equity is another
alternative to removing the potential for investors to demand repayment.

2. Both convertible debt and convertible equity are "securities" -- so blue sky laws apply the same in both cases.

Re: What is the economic difference between a conversion discount and warrant coverage for a convertible note?

Yokum — Sun, 20 Mar 2011 04:33:01 -0000

No. See answer above in the comments.

Re: What should the maturity date of the convertible note be?

Yokum — Tue, 08 Mar 2011 20:01:57 -0000

@Ian - in the past, convertible debt typically referred to bridge loans to "bridge" a company in between rounds of financing (in between Series A and Series B). Nowadays, most people think of convertible debt as a pre-Series A financing structure.

Re: What is an accredited investor?

Yokum — Tue, 08 Mar 2011 19:59:38 -0000

@tks - same thing; just alternative names

Re: What’s the difference between an ISO and an NSO?

Yokum — Thu, 03 Feb 2011 04:01:43 -0000

@Rahul - Typically, an option agreement has language that says that the option must be exercised within X days (i.e. 90 days) of termination of status as a service provider. Service provider is broad enough to encompass employees, directors, consultants, advisors, etc. Thus, an employee can move to contractor status and the option typically continues to vest and does not need to be exercised. in addition, the 90 day period can be extended. However, the ISO will turn into an NSO if the employee is no longer an employee after 90 days.

Re: What are the terms of Yuri Milner/SV Angel’s Start Fund $150K investment into Y Combinator companies?

Yokum — Mon, 31 Jan 2011 20:59:36 -0000

@Max - I don't think it is very likely that the Start Fund would ever convert in the Series AA. If there are problems with the company, it is better to be debt rather than equity from a bankruptcy perspective. There are already provisions to deal with a sale of company or IPO before a round of financing.

If the debt is converted to Series AA, then the holders of the Series AA would have a block on a sale of company. In that situation, I don't think that there would be any other holders of Series AA -- unless other convertible debt existed that had similar conversion into Series AA provisions.

Re: What are the terms of Yuri Milner/SV Angel’s Start Fund $150K investment into Y Combinator companies?

Yokum — Mon, 31 Jan 2011 20:38:04 -0000

@Max - that's for the Series AA. If the note converts into Series AA at the investor option upon maturity, then you can't sell the company without majority Series AA approval.

Re: What are the terms of Yuri Milner/SV Angel’s Start Fund $150K investment into Y Combinator companies?

Yokum — Mon, 31 Jan 2011 20:26:10 -0000

@Max - No.

Re: Is convertible debt with a price cap really the best financing structure?

Yokum — Sat, 15 Jan 2011 18:50:34 -0000

@Matt - I suspect the 409A folks would probably ignore the common stock issued upon conversion. Certainly, a warrant might be better, but I think the reality is that we're stuck in an environment where the seed financing market has moved to convertible debt with discounts and price caps, as opposed to warrant coverage.

Re: Is convertible debt with a price cap really the best financing structure?

Yokum — Sat, 15 Jan 2011 04:37:48 -0000

@Johne - Issuing common stock to investors at a high price screws up your ability to issue options to employees at a low price. In addition, most sophisticated angel investors will not agree to a common stock financing.

Re: What is an 83(b) election?

Yokum — Mon, 20 Dec 2010 00:47:47 -0000

@Pete - you should consult with an attorney with regard to your specific facts. I would file an 83(b). I suspect that the 30 days would have started from 10/1/10, although there is some argument that perhaps the interest was granted on 1/1/10, then later subject to vesting on 10/1/10. Hard to tell without all of the facts.

Re: What is a cap on a participating preferred liquidation preference?

Yokum — Mon, 20 Dec 2010 00:44:50 -0000

No particular shortcut. You have to read the certificate of incorporation and create a model.

Re: What is Class F common stock?

Yokum — Thu, 09 Dec 2010 01:31:55 -0000

@Francis - Class F should be implemented when the company is incorporated and before shares are issued.

Re: What is an accredited investor?

Yokum — Thu, 09 Dec 2010 01:30:15 -0000

@PEL - correct

Re: What is an 83(b) election?

Yokum — Thu, 09 Dec 2010 01:29:58 -0000

@Rafael - don't know.

Re: What should the vesting terms of founder stock be before a venture financing?

Yokum — Thu, 09 Dec 2010 01:28:58 -0000

@Ryan - stock purchased at FMV can subject to vesting. However, if the transaction is for capital raising purposes, it would be odd to have them subject to repurchase if the founder quits.

Re: What is a convertible bridge note with a price cap?

Yokum — Thu, 09 Dec 2010 01:27:17 -0000

@Mike - I don't think there is an open source convertible note set of documents out there.

Re: How many shares should be authorized in the certificate of incorporation?

Yokum — Thu, 09 Dec 2010 01:26:37 -0000

@NYCdays

1. Doesn't matter. That's just math. I typically suggest 9M.

2. You can't.

3. You should express equity as an exact share number, not a percentage.

4. Startups typically don't authorize preferred stock.

5. You can issue stock anytime.

Re: What is an 83(b) election?

Yokum — Thu, 09 Dec 2010 01:24:34 -0000

@Guest - stock subject to vesting is typically structured as a repurchase right that lapse based on continued services. Founder stock vesting is typically based on continued services. Don't understand the question.

Re: What is an 83(b) election?

Yokum — Thu, 09 Dec 2010 01:22:33 -0000

@Pete - it doesn't seem like the interests are subject to vesting (risk of forfeiture), so no 83(b) election is required. However, one can't tell without reviewing all of the documents.

Re: What happens to the convertible promissory note if the maturity date is reached and there hasn’t been a financing?

Yokum — Mon, 13 Sep 2010 23:38:24 -0000

@Jeff - I don't think I'd agree to that as an investor. Possible, but certainly not common.