What is the best way to put formulate a convertible debt document for a start up.?

Question

In a sense what is the best way to put together a convertible debt document, meaning how many years, what percentage interest, how much a discount should be given at conversion, what other benefits should be included for the investor and the company? I would like to raise $750,000 with this. I don't think I would need another around of funding but just to be sure, I would want the investor to have the best of both worlds.

Your thoughts.

Answer 1

Maturity should be the period of time during which you expect to either be able to repay the principal or become a business entity viable enough to refinance convertible debt with straight debt. As to interest rate and conversion ratio, you pay with one for the other. If you want low interest rate (these days, zero-coupon convertibles are not unusual), you have to pay for it with a higher conversion ratio. If you want a low conversion ratio, prepare for a higher interest rate.

You should also know that valuing convertible securities requires some serious professional training. At the very least, you should understand the Black-Scholes model. Professional convertibles traders go even deeper; they use binomial models...