How is a Gust Launch convertible note different?
Convertible notes are more complicated and historically require more negotiation than SAFEs, which makes them less attractive to friends and family investors but more desirable for professional angel investors. To effectively negotiate a convertible note round, founders therefore need to understand the note’s mechanics. The Gust Launch convertible note removes the difficulty of the negotiations (and reduces risk to founders) by distilling the most typical balance between founder interests and investor interests into a standardized convertible note that focuses on the most important terms for both sides, which helps keep the transactions costs down.
Here’s how a Gust Launch convertible note works:
- All of a company's notes will have the same maturity date
- Interest is set between 3% and 10% per year and accrues monthly
- The discount rate is set between 15% and 30% in 5% increments
- The valuation cap is negotiable according to your agreement with your investors
- The note contains a minimum conversion trigger
- Like the Gust Launch SAFE, it is only available to accredited investors
The Gust Launch convertible note provides the elevated terms and considerations that many syndicated angel groups and pre-seed funds have come to expect, including interest, maturity, and industry-standard discount rates. Where the Gust Launch convertible note differs is its valuation cap: if a subsequent group of noteholders receive a lower valuation cap than an earlier group, the earlier investors will also receive the lower valuation cap, but future noteholders can still receive a higher valuation cap without triggering any changes to the previous noteholders. Essentially, earlier money will alway get the most optimum terms—just as risk-tolerant early-stage investors expect.
Crucially, the Gust Launch SAFE and convertible note work together: early-stage investors can sequentially participate in a pre-debt and debt round with confidence knowing that the company is in a good equity position to pursue a preferred stock investment, and founders can conduct multiple pre-seed rounds across multiple notes without being surprised at the cascading dilution when all their convertible instruments turn into equity at the first preferred stock raise. Unlike the one-off unintegrated instruments available today, the Gust Launch convertible stack is simple and easy to understand, especially in terms of how dilution will affect all parties when the company successfully raises its first priced round.
Last updated on October 3, 2018