Anatomy of a Silicon Valley Convertible Note Financing(シリコンバレーのコンバーティブル・ノート・ファイナンスの解説)



Hi.  It’s John Sasaki again.
Ichigo is ready for the holidays!

Awhile back I wrote an article about the popularity of convertible note financings in Silicon Valley. 

Today, let me provide a brief overview of the specific terms of a convertible note financing in Silicon Valley.

This is not intended to provide you with a comprehensive explanation of Silicon Valley convertible note financing terms.  However, hopefully this can serve as a framework for your better understanding of Silicon Valley convertible note financings

1. Documentation

The main document in a Silicon Valley convertible note financing is the Convertible Promissory Note (the “Note”).  The Note contains the main terms of the loan, as well as the conditions under which the debt is converted into equity.

Sometimes the Note is the only document.  Other times, the parties also enter into a Note Purchase Agreement.  The role of the Note Purchase Agreement in a convertible note financing is basically the same as the Stock Purchase Agreement in a preferred stock financing.  This document sets forth the terms and conditions of the purchase of the Note, such as representations and warranties and closing conditions.

2. Terms of the Note

 The Note includes two main kinds of provisions: (i) terms related to the loan (because, after all, the Note initially represents a loan); and (ii) terms related to the conversion of the Note into equity.

a. Terms of the Loan 

As mentioned above, initially, the Note represents a loan. So the Note will typically include common terms that might apply to any other loan, including the following.

  1. Interest Rate
    The Note will typically include an interest provision, at a market or other negotiated rate.  As you probably know, the market interest rate in Japan is generally lower than in the U.S.  For U.S. lenders, a concept called “imputed interest” applies, so a minimum level of interest is required (or the lender will have to pay tax on a statutorily deemed interest rate)
  2. Maturity Date
    The maturity date represents the term of the loan.  In theory, the term of the Note should be the amount of time until the company must raise its next round of financing.  This in part depends on the amount of the Note financing, and in general can be anywhere from six month up to three years.
  3. Events of Default
    The Note will include a definition of “Event of Default”, which would accelerate the maturity date.  Typical items included within the definition of “Event of Default” would include a material breach of the Note (or the Note Purchase Agreement), or an insolvency or bankruptcy event of the company.  Additional Events of Default can be added on a case-by-case basis through negotiation between the parties.

b. Terms of the Conversion 

The Note will also include various terms related to the conversion of the Note into equity securities of the company.

    1. Conversion Triggers
      The main conversion trigger is a “Qualified Equity Financing”, which is generally a preferred stock financing of at least a certain size (not including the amount of the Notes to be converted).  In the case of a Qualified Equity Financing, the conversion is automatic, which means that the investor does not have a choice regarding the conversion of its Note into equity.

      There are also other conversion triggers in a typical Note.  Some of the other common conversion triggers are a sale of the company or an initial public offering, and sometimes even the maturity of the Note.  These conversions can be automatic or at the option of the investor, depending on the negotiation between the parties.

      However, for purposes of this article, we will focus on automatic conversions triggered by a Qualified Equity Financing.

    2. Qualified Equity Financing Threshold 
      Because the conversion of the Notes upon a Qualified Equity Financing is automatic, the investors will want to ensure that the trigger is based on a “real” financing event, (and not one that can be manipulated by the company solely to force the conversion of the Notes).  Accordingly, the definition of “Qualified Equity Financing” typically includes a threshold amount (which excludes the amount of the Notes).

      The threshold for the Qualified Equity Financing is negotiated between the parties.  However, as one rule of thumb, the threshold for a Qualified Equity Financing should be more than the amount to be raised in the note financing.  Otherwise, the holders of the Note as a group will have more than a majority of the preferred stock issued in the Qualified Equity Financing.  Practically speaking, this might make it difficult for a new investor to agree to invest in the Qualified Equity Financing.

    3.  Conversion Rate
      The fundamental economic term of the Note conversion is the conversion rate.  In short, this is the number of shares of equity that the investor will be issued upon conversion of its Note, and so the conversion rate is generally calculated as a price per share for the equity (which is also known as the “conversion price”).

      In a Qualified Equity Financing, the conversion price is typically the lower of two calculations: (i) a discounted price from the price paid by the investors in the Qualified Equity Financing; and (ii) the price determined based on a pre-set pre-money valuation of the company (which is also known as the “valuation cap”).

      In other conversion triggers, the conversion price is generally based on the price of already outstanding shares (preferred or common), which may or may not be discounted, or the valuation cap.

      (a)   Discount Rate – The discount is intended to compensate the Note holders for their risk as compared to the investors in the Qualified Equity Financing.  In other words, the company grants a lower price to the Note holders because they invested at an earlier stage than the investors in the Qualified Equity Financing (when the risk was higher).  The amount of the discount is negotiated between the parties, with the typical range from 20% to 30% (although I have seen as low as 0% and as high as 50%).  In general, the higher the risk, the larger the discount.  So an earlier stage convertible note financing might have a 30% discount, while a later stage one may be only 20%.

      (b)   Valuation Cap – The valuation cap puts an upper limit on the conversion price, which limits the amount of dilution that may be suffered by the Note holders when the Notes convert into equity.  In theory, the amount of the valuation cap is the maximum pre-money valuation expected for the Qualified Equity Financing.  The amount is negotiated between the parties, and depends on the stage of the company, the amount to be raised in the note financing and what the company intends to do with the funds, among other factors.

    4. Conversion Stock
      If the Note converts upon a Qualified Equity Financing, the equity into which the Note converts (known as “conversion stock”) is typically the preferred stock issued in the Qualified Equity Financing.

      However, please note that in certain cases the Note converts into preferred stock and common stock.  In these cases, the conversion price (as explained above) determines the total number of shares to be issued to the Note holder.  However, within this number, the number of preferred shares is determined based on a conversion price equal to the price paid by the investors in the Qualified Equity Financing.  The difference between the total number of shares and the number of preferred shares will be issued in the form of common shares.  This is a bit complicated, but the principle is that the Note holders should receive preferred stock on the same terms as the investors in the Qualified Equity Financing, including the price, but then the discounted portion should be issued as common stock.

      In other conversion triggers, since there is no new preferred stock to issue, the conversion stock is either an existing series of preferred stock or common stock.

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The construction of a convertible note financing described above is not legally mandated for the most part, so there can be variations on the structure described above.  Also, as mentioned above, this is not intended to be a comprehensive explanation, so please note that there are variations of the convertible note financing terms described above.

At times in the future, I will try to address specific issues related to Silicon Valley convertible note financings that may be useful to Japanese investors.

In the meantime, if you have any questions, please feel free to contact me at


こんにちは ジョン佐々木です。




1.  資料

シリコンバレーのコンバーティブル・ノート・ファイナンスにおける主な資料は、Convertible Promissory Note(以下「ノート」)です。ノートには、ローンの主要な条件と、ローンが株式に転換される条件が規定されます。


2.  ノートの条件  


a. ローンの条件


  1. 利息
  2. 満期日
  3. 不履行事由

b. 転換の条件


  1. 転換のトリガー



  2. 適格資金調達の金額要件


  3. 転換比率



    (a)  ディスカウント率
    ディスカウントは、適格資金調達における投資家と比較したリスクテ イクについて、ノート保有者に報いる趣旨です。つまり、ノート保有者は 適格資金調達における投資家よりも早い段階(リスクがより高かったとき)に投資してくれたから、彼らに対してより低い価額を認めてあげるわけです。ディスカウントの程度は当事者間で交渉されますが、20%から30%の幅が典型的です(ただし0%のケースも50%の高率も見たことはあります。)。一般的に言えば、リスクが高ければディスカウントも大きくなります。したがって、よりアーリーステージでのコンバーティブル・ノート・ファイナンスであれば30%のディスカウントかも知れませんし、レイターステージであれば20%のみかも知れません。

    (b)   バリュエーション・キャップ

  4. 転換による株式



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【参考和文作成:弁護士 林 賢治】



AZX Professionals Group
AZX Professionals Group
弁護士 パートナー
横田 隼
Yokota, Hayato
AZX Professionals Group
弁護士 パートナー
雨宮 美季
Amemiya, Miki