Shoot the Moon with Revenue Rocket

Key points

• Convertible notes provide sellers flexibility to participate in upside if the business performs well, while also offering some downside protection.
• Convertible notes involve a seller providing a loan to the buyer, with the option to convert the remaining balance to equity at a future trigger point.
• The conversion trigger is typically a date or milestone, after which the seller can choose to convert the note to equity rather than receive the remaining cash payout.
• Convertible notes are commonly used in IT services M&A to allow sellers to "have a second bite at the apple" if the combined business grows significantly.
• Thorough due diligence on the buyer's financial stability and growth plans is critical for sellers considering a convertible note.
• Dilution from multiple acquisitions is generally not a major concern with convertible notes, as the structure can be designed to minimize impact.
• Key negotiable terms for convertible notes include interest rate, payment schedule, and conversion triggers/parameters.
• Sellers should seek legal and M&A advisory expertise when structuring convertible notes to ensure favorable terms.
• The main benefits of convertible notes for sellers are reduced upfront risk and the ability to participate in future upside.

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