LegalGELegalGE
...

Convertible Note Structuring

What is a Valuation Cap?

It's the maximum valuation at which your note will convert into equity. It protects investors from paying a higher price if your startup becomes very valuable.

Do I have to pay back the loan?

Ideally, no. The goal is for the loan to convert into equity. However, if the company fails to raise more money by the maturity date, repayment may be required.

What is the typical discount rate?

A typical discount rate is 20%, meaning early investors get shares 20% cheaper than new investors in the next round.

Can an LLC issue convertible notes in Georgia?

Yes, Georgian LLCs can issue convertible debt instruments, and the law allows for flexible capital structures.

Reading Time

2 min

Published

...

Introduction: What is a Convertible Note?

A Convertible Note is one of the most popular instruments for investing in early-stage (Seed Stage) startups. It is a loan that, over time or upon the occurrence of specific conditions (e.g., a future investment round), automatically converts into company equity (shares) instead of being repaid in cash. For investors, this is a way to get equity at a discount, while for founders, it is quick cash without immediately determining the company's valuation. In Georgia, this instrument is increasingly used by tech startups.

What Does This Service Cover?

Structuring a Convertible Note involves legal and financial design:

  • Economic Terms: Defining Valuation Cap, Discount rate, Interest Rate, and Maturity Date.
  • Trigger Definition: Precise definition of events that trigger conversion (Qualified Financing Round, Liquidity Event, IPO).
  • Drafting the Agreement: Preparing a loan agreement with conversion mechanisms compliant with Georgian law.
  • Corporate Authorization: Preparing partners' resolutions authorizing the director to take on convertible debt and issue shares in the future.
  • Cap Table Modeling: Calculating how the shareholding structure will change after conversion (Dilution impact).

Common Real-World Scenarios

This instrument is ideal for:

  • Seed Funding: When a startup is too early stage to accurately value.
  • Angel Investors: Individuals wanting a simple process without complex shareholder agreements.
  • Friends & Family Round: Formalizing loans from close contacts with the upside of equity if the company grows.
  • Bridge Financing: Existing investors putting in more cash before the next major round.

Georgian Legal Framework

The 2021 Law on Entrepreneurs introduced revolutionary changes favoring convertible instruments. The law now explicitly recognizes "Conditional Capital" and "Classes of Shares". This means a company can pre-authorize the issuance of shares for convertible right holders in its charter. Previously, this was regulated mainly by the Civil Code (loan), creating enforcement risks. Under new regulations, investor conversion rights are much more secure.

Service Process

Structuring proceeds in stages:

  1. Term Sheet: Agreeing on key terms.
  2. Legal Formation: Lawyer drafts the agreement and corporate documents (charter amendments if needed).
  3. Signing: Parties sign.
  4. Transfer: Loan is disbursed.
  5. Management: Upon maturity or investment round, the lawyer ensures formal conversion in the registry.

Why Use Legal.ge?

A Convertible Note seems simple but contains mathematical and legal nuances that can leave a founder with little equity. On Legal.ge, you will find startup-focused lawyers who will help you maintain the right balance between investor interests and your control.

Updated: ...

Specialists for this service

Loading...