Coupon convertible note


What is a Reverse Convertible Note (RCN)?

So — how did Thiel manage to procure He likely structured his convertible note with a favorable cap , a term offered to early-stage investors that goes into effect when convertible securities convert into equity. In addition, because convertible notes are debt instruments, they are required to have a fixed interest rate , which can nominally increase the amount at which an initial investment converts into equity. Nearly all convertible securities are issued with a cap. If the valuation ends up being lower than the amount of the cap, the investment made via the convertible note will convert to equity at the amount of the priced round.

How do convertible notes work? - SmartCompany

However, if the valuation is higher than the cap, the investment made via convertible note will convert to the amount specified by the cap. In this latter case, the investor is rewarded for their earlier bet on the startup. Discount: A discount on a convertible note states the percentage reduction on round valuation at which the convertible note will convert relative to the next qualified priced round.

Effectively this permits an investor to convert the principal amount of their loan plus any accrued interest into shares of stock at a discount to the purchase price paid by investors in that round.

Basically, a discount on a convertible note is like a coupon starting that early investors can later purchase equity in the startup on sale. Valuation Cap and Discount: Sometimes, a convertible note will include both a valuation cap and a discount. Typically, the investment will convert at the lower of the two valuations, which favors the investor. Occasionally, the terms are such that this interest can be paid out in cash and others may offer the return of the principal also.


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Other times the interest is added to the amount of investment paid on the outset and on conversion the total will be converted into shares. Please note, not all CLNs have a coupon attached and it is important to check the term sheet in each case to see which the company is offering. There is a longstop date by which the investment must be converted into shares.

Twitter to offer $1 billion convertible note as shares rally

If the company has not reached the funding target set out in the term sheet to trigger conversion by the longstop date, the investment plus any interest is usually repaid in full. There may also be other causes for default set out in the term sheet or it may be chosen by the investor upon conversion. In some cases, it is possible to notify the company at any point to convert the investment into shares at the max price set out in the term sheet.

This will be highlighted in the term sheet.

In the event of a sale of the company before a conversion event, usually the company will issue a conversion notice and a redemption notice for investors to decide which to opt for. Please note, each CLN will have different terms around this and it is important to check the term sheet in each case. In some cases, the CLN is secured, however, most likely it will not be as it is usually thought of not as a debt instrument but rather as prepayment for shares. Each term sheet will be different.

So, your total return is limited to the stated coupon interest rate. RCNs could be suitable for investors looking for the predictable, higher income streams than can be found on traditional fixed-income investments and can tolerate the risk of losing some of the principal. Investors should only buy into RCNs when they believe that the underlying stock will not drop below the knock-in level. Keep in mind that the companies who sell these investments are betting that the stock price will drop below the set barrier, or at least be volatile enough to make this a possibility.

Discounts Vary Based on Maturation & Risk

With higher risk there should be higher potential reward, and this is true for RCNs. In addition, you should be comfortable with the RCN's underlying company because you could end up with shares of its stock when your RCN matures. So be sure to read the offering circular and prospectus carefully before investing.

Finally, you should only invest in RCNs if you understand the ins and outs of options. Convertible Notes. Alternative Investments. Fixed Income Essentials. Municipal Bonds.

What is a Convertible Note?

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  • An Introduction to Reverse Convertible Notes (RCNs).
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