As it becomes clearer that ‘saving your runway‘ will be a critical move to not only survive, but thrive in the conditions, more companies are looking to get their ‘raise process’ started.
But some early stage companies are hitting roadblocks when confronted with one critical question – “What are we worth?”
For many companies, the answer is not clear.
Maybe you have not had the time or resources to get a proper valuation done. Maybe you did do a valuation, but your prospective investors just don’t agree with it. Or maybe your company is just so damn novel that no one has a bloody clue how to value it.
So what do you do?
Honestly, we wouldn’t recommend either.
And unfortunately, what most companies actually do in these situations is postpone the raise idea altogether, and try to survive without it. Risky move in these times.
The Solution – raise now, value later
What you could do, if you:
is raise by a Convertible Note.
In short, a Convertible Note is a way to raise through a mixture of debt (a loan) and equity (giving away shares).
It involves an agreement between the company and the investor to loan money to the company, in return for shares on the happening of some certain event, for example, a successful capital raise of $X.
And if that event doesn’t happen, the loan is paid back by the company, with interest– simple as that.
The huge advantage with this form of raising is that you don’t really need to know what your company is worth to get the funds in your account – you simply agree that when your company does eventually do a raise, and your equity is valued, the lender will be provided shares at that value based on the funds provided (with any discount that might be agreed).
This keeps everyone happy:
One word – negotiations.
When carrying out an equity capital raise, the Company needs to work out:
With a convertible note, all that is really needed is:
While you can do equity raises quickly and easily, if you do get stuck, the Convertible Note may suit you for now.
Many companies will also use a Convertible Note as a ‘bridging round,’ to get extra funds in between equity rounds.
Not at all.
To keep track of your notes, you can enter them in on the Cake Note Registry. This will allow you to easily see the fully diluted share table (in graphs and more), and also to be notified of upcoming events (such as maturity dates). The investor can also keep track of their Convertible Note investment here too, giving them transparency and confidence in their investments and the Company.
One thing to keep in mind when using Convertible Notes, is your future plans. Don’t forget that it is likely these note holders will, at some point, become shareholders.
We have had first hand experience of the benefits of raising through Convertible Notes here at Cake – so we can really vouch for the springboard they provide.
A Convertible Note worked well for Cake as we were able to obtain early funding which allowed us to build and grow, while avoiding the delays and complications of a valuation. It still offered a financial return to investors via the 30% discount to the priced round. With the Convertible Note funding we progressed the company to achieve milestones that allowed a priced equity Seed Round. – Jason Atkins, Cake CEO
If a Convertible Note is something you might be interested in to extend your runway, get in touch with the team today.
Cake makes equity easy.