Do convertible note holders get pro rata rights?

Generally speaking, convertible notes do not include a pro rata right clause. Investors may still be included in subsequent rounds in these cases, but at the discretion of the round lead and the company.

How does a tag along right work?

Tag-along rights also referred to as “co-sale rights,” are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells his stake, it gives the minority shareholder the right to join the transaction and sell their minority stake in the company.

Can a convertible note be secured?

Convertible notes are a form of debt. Secured debt comes with a “security interest” in identified assets. It is nearly unheard of for a company to issue secured debt in an early-stage financing.

Why do startups issue convertible notes?

Convertible notes allow startups to focus on growing their business before they have to start paying back debt. This is particularly important for tech companies that need to spend a lot of time fine-tuning their product. Convertible notes are a fast and straightforward way for startups to raise money.

Are tag-along rights standard?

Tag-along rights allow minority holders to also join in this premium and be able to sell their shares at this higher price in any sale between a majority and a third party. Because tag-along rights are rights and not obligations, minority shareholders may or may not choose to exercise them.

Are tag-along rights common?

Tag-along rights are a common contract provision, but they’re generally not offered automatically to minority shareholders.

Are convertible bonds secured?

Seniority in capital structure – most convertible bonds are senior, unsecured liabilities of the issuer, but some can be structured to be subordinated to other senior unsecured debt, or may be unsecured when an issuer uses significant amounts of secured debt (for example, in the real estate sector).

What is a convertible note agreement?

A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to a startup and instead of a return in the form of principal plus interest, the investor would receive equity in the company.

Why do companies offer convertible notes?

Companies issue convertible bonds to lower the coupon rate on debt and to delay dilution. A bond’s conversion ratio determines how many shares an investor will get for it. Companies can force conversion of the bonds if the stock price is higher than if the bond were to be redeemed.