Seed funding · Fundraising

Best TEMPLATE: Convertible Note?

Robert Gordon Co Founder at OurRecovery "Because No One Can Do it Alone"

February 20th, 2016

There are 2 of us; 1 tech and 1 created biz concept and wireframes for MVP and MVP 2.0, strategy, biz dev [face of the company]. We're starting with Recovery from Drugs and Alcohol as proof of concept [B2B & B2C].Ultimately, the company is building a Platform for Recovery: whether illness like Cancer, Death of a loved one, Mental Illness, weight... This will be the 1st time there will be Real Live DATA from the day to day behavior of Alcoholics and Drug Addicts.

We have a Rehab to do the initial testing where the CEO has the number 1 book on Amazon in the field. Third member to come on a little later in the process. The TEAM's track record includes raising $10 million, successful exitS, deep domain experience. The stage is "Friends & Family" although the investor is neither.

We're looking for enough $ to finish building and testing a clickable set of wireframes, create a digital prototype of an "Electronic Coin" [think Fitbit for Recovery] and get expert help in building a presentation for a crowdsourced funding round. No only will this business have obvious exits in Healthcare and health Insurers but it has the potential to save hundreds of thousands of lives and billions of dollars over the next decade.

Thee CEO of the Rehab is an advisor who kicks off the building of an advisory board of experts.

Roger Rappoport Partner, Procopio

February 22nd, 2016

I agree that you should look at a SAFE (and 500 Startups' KISS), but they are, in my experience, not very negotiable, and there are some provisions that are not very "founder friendly."

Roger Rappoport Partner, Procopio

February 21st, 2016

Robert, I wouldn't advise using a template, but would advise speaking to your legal counsel about  bridge financing documents that are appropriate for your company.

The  funds that you raise at the early stages can have a significant impact on what the founders' ultimate exit looks like and can also have an impact as to when the founders lose control.  Raising the right amount of money, from the right investors, using the appropriate instrument, but on the wrong terms, is not something that is typically fixable and invariably effects the exit and control as related to the founders. 

(If you are in Silicon Valley, I think
you might fimd my next workshop--"Developing an Appropriate Funding Strategy For Your Startup"--to be useful. https://www.eventbrite.com/e/startup-fundamentals-workshop-3-understanding-the-terms-in-term-sheets-and-how-to-negotiate-them-3-tickets-20754570479?aff=SVSE Or you can get
More info on my website--Accesssiliconvalley.net)

When I draft bridge financing documents,  The following are some of the things that will inform my decision as to the terms to be included or excluded from the financing documents:

-- what is the risk profile (execution risks, technological risks etc. )

--  what is the amount of the raise?

--  what is the company's overall funding strategy? (i.e the value inflection points of the company and amounts needed to get from each to the next)

--  who are the targeted investors? (F&F/high net worth individualss/organized angels etc.)

--  what is the anticipated time to the next round that will trigger conversion? 

I often see folks getting into trouble because they find a "form" that may or may not be appropriate given the particular circumstances. My view is that, while there may often be similarities, typically "one size doesn't fit all." 

Depending on the circumstances, the following are some of the terms that I would consider in determining the terms of your note/note purchase agreement:

-- time to maturity (and this will be informed by your funding
strategy)

-- cap and discount?

-- cap only?

--discount only?

-- amount of cap, discount percentage?

-- warrant coverage instead of discount? (warrant coverage is more company friendly)

-- conversion terms/payout if change in control before a "qualified financing" or the maturity date. 

--what happens if there isn't a "qualified financing" or change in control  before the maturity date? (This is where the founders can really get hurt). 

I understand why most entrepreneurs will use templates or forms. At the early stages, it's all a question of allocating scarce resources. However, spending a few dollars to create funding docs that are appropriate for your company could potentially (and significantly) change the exit economics for the founders, and the time before which they will ultimately lose control. I think we, in Silicon Valley, are too often "slaves to convention," and I constantly find myself having to question that "convention" and ask whether or not something is or isn't appropriate, given the facts and circumstances in each particular situation. 

 







Roger Rappoport Partner, Procopio

February 21st, 2016

Robert, sorry, but gave you the link to "Negotiating Term Sheets."  Here is the link to "Developing a Funding Strategy." 

Roger Rappoport Partner, Procopio

February 21st, 2016

Here you go:
https://www.eventbrite.com/e/startup-fundamentals-workshop-2-developing-an-appropriate-funding-strategy-for-your-startup-tickets-20754491242?aff=SVSE

Robert Gordon Co Founder at OurRecovery "Because No One Can Do it Alone"

February 21st, 2016

Roger, Thanks for your time investment... I will look at your website... Maybe I'll meet you at your workshop "if it's affordable"! I live in the valley so maybe we can have coffee... thanx

Marcus Spillane Serial Entrepreneur and experienced Finance, Investment and Business Development Executive

February 22nd, 2016

Robert,

I'd also take a look at Y Combinator and their "SAFE" document for a bit of education and for consideration

https://blog.ycombinator.com/announcing-the-safe-a-replacement-for-convertible-notes


Karl Schulmeisters CTO ClearRoadmap

February 23rd, 2016

You also need to take a look at how your model interacts with FDA regulations. 

Ultimately, the company is building a Platform for Recovery: whether illness like Cancer, Death of a loved one, Mental Illness, weight... This will be the 1st time there will be Real Live DATA from the day to day behavior of Alcoholics and Drug Addicts.

This seems to make your software a "medical device" and thus subject to at least 501k regulations.  Take a look at the free content we offer for mHealth solutions (https://www.clearroadmap.com/Home/Free mHealth Checklist)  to get an idea of what barriers you might face (you'll have to register for a basic account but we don't use that for anything other than internal marketing followup). 

One of the things many folks in this area don't get is that the moment you start tracking parameters to be used in any sort of medical setting, your software becomes a "medical device"

and the moment you do any sort of automated "recommendations"  you are also potentially a "medical device".   If you find the mHealth checklist useful - we have a more detailed visual workflow through the regulatory processes that will give you actual cites to the FDA processes.

If you do not fully understand the regulatory environment here, I strongly recommend you dig into it since what claims you actually make can be the difference between

  • No FDA regulation
  • Need to get FDA "clearance" (which can be as low as $50k through the process)
  • Need to get FDA "approval" (which starts at about $100k and goes into the millions)

you need to understand this to be able to raise money

Robert Gordon Co Founder at OurRecovery "Because No One Can Do it Alone"

February 23rd, 2016

Karl,

As always you always give good advice... I will follow it thanx
r