The Business of Venture Capital, 3rd Edition

26Structure of the Term Sheet

OVERVIEW

A good investment structure allows an investor to double up and invest higher amounts as the opportunity progresses — or minimize the risks if it craters. The two major types of investment structures are (a) convertible loan, also called convertible note — which converts to preferred equity and (b) preferred equity. These are compared in Exhibit 26.1. Convertible notes are often termed as “company friendly” as investors have only economic upside with little recourse for recovering their investment, nor do they have any control provisions and hence are exposed to a high level of risk. At the seed and early stages, convertible notes are the de facto norm and considered as a standard structure.

CONVERTIBLE LOANS AND SAFE

The convertible loan (also called convertible note) is a simple and popular investment structure that is used more often by angel investors and early-stage investors.

A convertible loan starts with senior position on the balance sheet and drops down, or converts to equity, when the company meets certain milestones. Primarily used as a risk-mitigation tactic in the early stages of the company, a convertible note allows the investor to claim the assets of a startup if it fails. Alternatively, in certain conditions, the note holder can “call” the note, or ask for redemption under certain trigger conditions.

Exhibit 26.1 Convertible Loan and Preferred Equity.

Terms	Convertible Loan	Preferred Equity	Remarks
Structure ...