Full video: Convertible Bond Example (Coinbase)

https://youtu.be/1_3e93LUSag

$1.25B Convertible Bond

Monday May 17th Coinbase breaks $250 for a second time (first on last week thursday the 13th). It was also the saem day it came out with a Convertible Bond issue.

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Coinbase Global Inc. said Monday it plans to sell $1.25 billion of convertible debt, the same day its stock closed below its $250 reference price for the first time since the crypto platform listed on the Nasdaq exchange in mid-April.

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Terms

Financial Terms

• Amount
• Closing Date
• Maturity Date (1-2 years)
• Interest Rate (8% common)

Conversion Terms

• Automatic
  • Trigger
    • Discount
      • Example: 20% Discount represents (20% * Stock Price = convertable pirce)
    • Valuation "Cap"
      • Example: $3M Cap on 5m shares = $0.60 per share
• Optional
  • Investor can..
    • Call loan
    • Extend loan
    • Option coversion (usually if things don't gom well)
      • Example: the note will convert to stock if..
• Acquisition (while holding note)
  • 2x payout of interest and principle is a common case

Rights Terms

• Information
  • Example: Updates on earnings
• Approcal
  • Example:  veto rights for important decisions
• Board Observer
  • Example: Can watch meetings but not vote
• Pro-rata
  • Exampel: Maintain % ownership so have rights to invest more with additional fundraising rounds

Other Terms

• Most Favored
  • Option to adopt more favorable terms if they are offered in the future
• Use of Funds
  • Funds will only be used for...
• No pre-payment
  • Because investor intent is to convert into shares
• C-Corp
  • Investor requires the company if LLC or Scorp to convert to C-Corp in time of stock conversion (to avoid pass through income)

Why.. Convertible Note/Bond/Debt Pros & Cons

Investors

• Big growth potential
• Priority incase liquidation + priority over dividend payments
• Fixed interest rate  + par value returned at maturity (unless default)
• Conversion has no tax obligation

Company

Advantages

• Delays valuation while getting funding
• Legal costs much less
• Cheaper than other debt interest rates, such as non-convertable bond
  • Reduce payout to investors
• When Bond is converted to stock.. no more interest payments
  • Reduces debt after conversion
• Outstanding shares does not immediately inc. outstanding shares
  • Does not reduce EPS

Drawbacks

• Maturity date (pressure of laon call, loan extension, conversion)
  • SAFE (Simple agreement for equity)
  • Advantage for investor

Futher reading

https://www.investopedia.com/articles/stocks/11/dangers-of-stock-dilution.asp

https://www.toptal.com/finance/startup-funding-consultants/convertible-note

http://www.allenlatta.com/allens-blog/dilution-part-one-understanding-ownership-dilution

https://youtu.be/HNYfNn6c2B4