Agreeing on a valuation figure is always problematic in a start-up situation and much time and energy can be wasted on that. One interesting instrument I came across recently was a convertible loan note with a future valuation formula agreed. Commonly, convertible loan notes work like this;
An investor makes a loan to a company and earns an agreed % of interest each year. The loan will then either be redeemable after an agreed time frame or be converted into equity at that time at an agreed price. The instrument is very flexible and you can have many different variables (what is done with the interest, the number of years etc). This still leaves the problem of valuation to be agreed though. One of the loan notes I came across in Canada deals with this problem fairly neatly. The valuation is at an agreed discount (30%) on the next fundraising round. The benefit of this solution is that it allows valuation to be left till a future date when there should be some metric based valuation dependent on performance. Another instrument I came across was a redeemable preference share. This acts like a convertible note but allows for massive upside in the case of a sale of the business. The example I came across was that an investment of $1m was made and this would equate to 20% of the business but would be treated as a loan. If (when) the business was sold, the $1m would be repaid and 20% of the net sale proceeds would go to the equity holders as well. (So if the business sold for $10m, the Noteholders ($1m) would get $2.8m ($1m + $1.8m (20% of $9m))). So although the business has doubled in value, the noteholders would get 2.8x the money invested. I think these instruments will increasingly be used in the next two or three years as angel investors look to protect themselves against high valuations and to ensure that they get a good upside for the higher level of risk they are being asked to undertake (in terms of other competing financial assets). Be interested in hearing from start-ups about their thoughts on these instruments.
0 Comments
|
Archives
February 2021
Categories |