Primer on convertible note offerings

[jlaw277]

For those who are trying to make sense of the current situation, here is a good overview regarding the pros/cons of a convertible note offering vs other forms of financing.  This is more focused on earlier stage companies, but given MNKD's current position, I think it is relevant.

Thinking Through the Implications of Convertible Notes

I found the following to be particularly instructive given that Mike mentioned how the UTHR purchase of the accelerated FDA review had taken them by surprise and was now forcing MNKD to be prepared 4 months sooner.  There may be other things in the works that will affect valuation causing MNKD to seek funding that would allow for this lack of clarity concerning value.  This seems somewhat similar to what is described below.  

Excerpt:

"For a variety of reasons, many companies need to raise some amount of funding between larger rounds of equity, and the features of a convertible note make it an ideal vehicle to complete those types of transactions. For example, one company that I have worked with had a transformational software deal with a large enterprise customer that was set to close. The company would need to ramp up its staff in order to service the new customer, and was planning to raise a new round of equity once the deal was signed; however, they could not disclose the specifics of the deal until that time. In order to get a jump start on the work once the deal closed, the company wanted to raise a smaller amount of funds via a convertible note as it would allow the funding to close more quickly. It would also allow the company to delay the valuation decision for the equity round, as that would likely be more favorable once they were able to disclose the full details of the new contract."

"Convertible note financings are simpler to document from a legal perspective. This means that they are generally less expensive from a legal perspective and that the rounds can be closed more quickly. The reasons for this are pretty simple, being that the company and the investors are putting off some of the trickier details to a later date. In most equity financings, numerous corporate documents need to be updated to close the round such as certificates of incorporation, operating agreements, shareholder agreements, voting agreements, and various other items. All of this adds to the time and expense of completing a round of equity funding."

"Raising a convertible note as opposed to equity allows the company to delay placing a value on itself. This is particularly attractive to seed-stage companies that have not had time to show much traction in terms of their product and/or revenue. In exchange for giving investors a discount on the price that is set later, the company is able to push that decision to a later date. Because of this, convertible notes are often used as the first outside funding invested in many companies, and a large number of institutional seed investors such as 500 Startups exclusively use convertible notes in their accelerator investments."