Convertible note · Angel investor

How have you structured a convertible note financing with warrants?

Ben Mackinnon Co-founder & CEO

December 11th, 2015

Our lead investor has asked for additional ownership stake via warrants struck at the round's valuation cap. He wants a specific %, not warrant coverage based on his investment amount. Has anyone seen this before? I'm a first timer so just want to make sure that I'm not shooting myself in the foot come the next round of financing (knock on wood) where we'll likely be approaching institutional investors. Any and all advice is much appreciated! 

Don Ross Managing Partner Digital Health at Life Science Angels

December 11th, 2015

It's reasonably standard for an early convertible note to have a discount OR warrant coverage. Anything that gives a permanent fixed percentage throughout future financing rounds will cause you grief. (In other words, the number of warrants are adjusted so that post financing the warrants maintain the same percent ownership as pre financing.) 

A professional priced equity round for preferred stock will include restrictions on issuing new stock and will have board and shareholder oversight. Prior to this round, the early warrant holder can be at risk of founders (who control the company) simply issuing new shares and diluting the warrant holders ownership. I have seen where these very early warrants were tied to the ownership of the founders. This would have been okay IF the clause was written to expire when a Qualified Financing occurred. (A Qualified Financing generally is defined as a priced equity round with a raise of X million dollars.) 

If this clause does not expire, then it can be a big mess. As a Seed/Series A investor, I have spent many unnecessary hours getting rid of percentage agreements that would have persisted after my investment.  It creates an extra burden to the financing. The permanent percent ownership position often is the result of inexperienced investors then who don't understand that they need to accommodate the incoming much larger equity round, or they will kill the company. It is a huge pain in the #$%&@#!

Bottom line: keep it simple. Either a discount or a fixed number of warrants is best. If you must grant a percentage, make certain that it sunsets (expires) with a preferred equity round. 

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

December 11th, 2015

Schemes to insure a certain percentage of ownership are common. At the same time, you need to consider whether the cost of the anti-dilution protection makes sense in the context of the term sheet as a whole. Convertible terms tend to be simple... interest rate, discount, and cap. Is your investor giving anything back on those?

Thomas Kaled Business Development Consultant @

December 11th, 2015

Without getting too terribly complex I would only issue warrants which expire at a specific calendar date as well as the events @Don Ross described.

Ben Mackinnon Co-founder & CEO

December 14th, 2015

Thank you guys! The warrants would be struck at the next round, so he couldn't not have the fixed % through multiple rounds (that just sounded a bit absurd to me). But I appreciate your help with figuring out how to structure and what questions we have to ask.