Rounds & financing
Also called qualified round, next equity financing
A qualified financing is an equity round large enough to trigger the automatic conversion of outstanding convertible notes or SAFEs, with the threshold defined in the instrument itself.
Convertible instruments convert into equity at the next priced round, but not just any round should do it. Without a minimum, a token $50,000 equity issuance could force conversion at terms that suit nobody.
The threshold is usually a stated minimum amount raised, commonly $1m to $5m at seed stage, and sometimes also requires the round to be a bona fide preferred stock financing rather than a friendly issuance.
Notes have a maturity date. If it passes without a qualified financing, the outstanding balance typically becomes repayable on demand, or converts at a fallback valuation stated in the note, or converts by agreement between the parties.
In practice the parties usually renegotiate, because a company that has not raised a priced round rarely has the cash to repay. SAFEs avoid the problem by having no maturity date at all, which is one reason they displaced notes at early stage.
Often $1m to $5m at seed stage, scaled to the size of the round the instrument anticipates. It should be large enough to represent a real institutional round.
Depending on the drafting, it becomes repayable, converts at a fallback valuation, or is renegotiated. Repayment is rarely realistic, so extension or conversion by agreement is the usual outcome.
Yes, they define an equity financing that triggers conversion, but unlike notes they have no maturity date, so an instrument that never converts simply remains outstanding.
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