Convertible Note Terms??

December 16, 2024

by a searcher from University of Virginia-Darden - Darden School of Business in Charlottesville, VA, USA

My partners and I have a company under LOI. It has a $10.5 valuation with a seller note for $7.5. We are looking looking at either an equity raise or a safe note raise. I wanted to know when the community is seeing on-market terms for convertible notes of late.

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Reply by a professional
from Stanford University in Chicago, IL, USA

If you're under LOI, you need to do Due Diligence before the acquisition. Customer Due Diligence as well as Financial Due Diligence (QoE) and Legal Due Diligence are required to mitigate risk. My firm, WHIZDOM Inc., specializes in Customer Due Diligence. Customer Due Diligence should be conducted by a third party like WHIZDOM since searchers are not objective, especially when they are excited about closing a deal. In addition, searchers don’t have the required skills expertise to conduct Customer interviews for Customer Due Diligence. Post acquisition, WHIZDOM interviews Customers for portfolio company CEOs to determine the impact of the acquisition, positively or negatively, on Customer relationships. WHIZDOM also interviews Customers to enable portfolio company CEOs to grow revenues by retaining current Customers, reducing churn and attracting new Customers. Feel free to contact me at Ivy Millman, ###-###-#### or redacted or set up a meeting using https://calendly.com/ivy-millman/phone-meeting

Reply by a professional
from University of Denver in Denver, CO, USA

Thanks for the tag ^redacted‌, I agree with the posts above. I haven't seen SAFEs in the context of a business acquisition, unless it was a smaller bolt on acquisition to an operating business. As mentioned above, SAFEs and Convertible Notes are typically for companies that plan to raise additional capital in the future with a priced round of funding and the Convertible Note or SAFE is there to help the company raise money as a bridge to that round. SAFEs and Convertible Notes also allow the company to raise money without negotiating with the investors about valuation (other than a valuation cap). In this case, if you are buying the business, you have a valuation (i.e., the purchase price you are paying). With that said, typical SAFE terms I see nowadays are: a post-money valuation cap or a discounts of 10%–25% (but rarely both anymore), no interest or maturity date. SAFEs are a good deal for the Company if you can convince investors to use them.

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