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C ONV E RT I B L E N OT E S
A P O W E R F U L E A R LY - S TA G E I N V E S T M E N T S T R AT E G Y
A new approach to finance is required during the current economic disruption and as the global economies begin to recover. Providing direct loans to qualified businesses in the form of a convertible note allows qualified companies quick access for proof-of-concept financing and the ability to lower the due diligence time and costs and protect founders’ equity positions. Leveraging a disciplined investment strategy, deep industry relationships and operational experience, investors can achieve returns significantly in excess of the traditional equity markets. There are three major benefits to becoming a creditor to early stage companies: Liquidity, Equity and Control. OVERVIEW FuseFinancial offers advisory services to startups and mid-market companies. Financial advisory services include capital raising, due diligence planning and business development to Technology and Energy sector companies. Fuse currently offers both strategic and tactical guidance to companies in these sectors and represents them to established institutional investors. Fuse management believes that many NewCo’s would benefit from financing in the form of a loan structured as a convertible note while positioning for a successful equity investment. INVESTMENT STRATEGY Lenders should focus on the underlying economics, an adherence to rigorous due diligence, the ability to accelerate an equity investment. In addition, building operational management post debt financing will enable the creditor the option of an exit since a smooth running company with a plan and a track record will attract an equity investment in the near term. An investor needs to take an active role in the management of the investment, in order to reduce risk and increase returns. Initial transactional structure, proprietary research and strategic thinking will be critical differentiators in the performance of this strategy. Sample Opportunity Technology Start-up Type: Location: Purpose of Loan: Employees: Bridge Amount: Interest Rate: Time to Liquidity: Software-as-a-Service California To Complete Beta 5 $250k 15% 9 months
Equity (after liquidity): 2% - 5%
The current market conditions are encouraging Venture Capitalists to increase deal activity however, they are expecting ventures to be further along before investing. This requires that the technology has reached the proof-of-concept stage as well as a clear plan for execution.
info@fusefinancial.com · (800) 919-6974
C O NV E RTI BLE N O TE S - A POW E RFU L E A RLY -S TAGE I NV E S TM E NT S TRATE GY
LIQUIDITY The lender will have the option to demand repayment of the loan at the time of a equity investment, at a point of profitability or other refinancing options for the company. As a driving force behind the planning, executing and closing of a equity investment, the creditor has the ability to directly impact liquidity. EQUITY In addition to making a significant return, the lender may earn Founder’s shares in a company for the strategic work that leads to a completed cash infusion for the company. Many of the ventures stand to provide exceptional returns over a 3 to 5 year period. CONTROL Startups have some of the elements necessary to be successful. However, they often miss the basics of finance and control. As a board member and a creditor, the lender will have the control necessary to create a successful company based on the vision of the founders. This strategy requires a thorough understanding of development costs, the options for bringing products to market and the best approach for an investment. PROCESS FuseFinancial recommends building momentum towards a successful financial transaction by aligning the following elements: Strategy, Documentation, Investor Relations and Legal. With all opportunities, Fuse analyzes the company, deal structure, funding requirements and optimal strategy in order to create a business plan. Sample Opportunity Projected Equity Liquidation Total Capitalization: Ownership: Return: Time to Exit: Total RoR (250k lent): Annual RoR (250k lent): $100mm 2% $2mm 4 years 800% 200%
The upside results from a loan which was recouped within 12 months of lending continue even after repayment. Even if only 1 in 10 ventures exit with the above scenario, the rate of return for all the lent money ($2.5mm across the 10 ventures) would equally an annualized Rate of Return of 20%.
As with all projects, successful investing is a matter of preparation followed by focused execution. FuseFinancial has a process for startups seeking equity investments. Lenders looking to take advantage of the power of convertible notes should established their own process to leverage these techniques for its own outsized financial return.
FuseFinancial created this document for informational purposes only. The information contained here does not constitute legal or fiscal advice nor does it provide specific investment advice. The information provided is for personal, non-commercial use. This work is licensed under the Creative Commons Attribution-Noncommercial License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc/3.0/
info@fusefinancial.com · (800) 919-6974