Washington Convertible Note Subscription Agreement
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How to fill out Convertible Note Subscription Agreement?
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FAQ
A Convertible Note Subscription Agreement is a contract for an investor to subscribe to a convertible note, which is a debt instrument that converts into equity under predefined conditions.
Convertible Notes are loans ? so they are recorded on the Balance Sheet of a company as a liability when they are made. Depending on the debt's maturity date, they can either be shown as a current liability (loans maturing within 12 months) or as a Long-term liability (loans maturing over 12 months).
A convertible note is a short-term debt instrument that automatically turns into equity when a predetermined milestone or conversion event occurs. Essentially, a convertible note functions like a business loan that converts into equity instead of being repaid..
Common provisions of a convertible debt financing include: The interest rate. Usually somewhere between 4% and 8%. The maturity date. Usually 12?24 months. A mandatory conversion paragraph. ... An optional conversion paragraph. ... A change of control provision. ... A conversion discount. ... A valuation cap. ... An amendment provision.
So the cash coming in from your convertible note will generally equate to the liability that you add to the balance sheet. And, if your accounting is doing a good job, the accrued interest is a non-cash expense that flows through your income statement and impacts your accumulated net income in the equity section.
New investor share price * (1 - discount rate) = $5 * (1 - 0.2) = $4 per share. Given that the typical condition under a convertible note agreement is that the chosen price should be the most desirable for the investor (the minimum of the two), the shareholder conversion price is $2.5 (using the valuation cap).
As noted above, convertible notes can be classified as all debt, all equity, or a mixture of both. To determine the appropriate classification, we need to consider the relevant definitions in IAS 32 Financial Instruments: Presentation.
Are SAFE Notes Debt? No, SAFEs should not be accounted for as debt but instead as equity. Experienced venture capitalists expect to see SAFE notes in the equity section of a company's balance sheet - therefore, they should be classified as equity, not debt.