According to the Vietnamese Enterprise Law 2014, a Vietnamese company may raise its charter capital by share offering. Share offering means the company’s increase of the amount of authorized shares and selling such shares during the company’s operation to increase charter capital. Share offering may be carried out in the following forms:
b) Public offering of shares;
c) Private placement of shares.
The idea behind convertible notes is that the company to which the note is issued is on a strong growth trajectory—amassing value for the investor and beelining to a priced round. Bottom line here is that the noteholder does not want to get their loan paid back. They want their debt to convert into a heavily discounted security in a company that’s on a rocket to the moon. On this context, a convertible note can be a simpler and faster way to get much-needed funds into the company.
In comparison to directly purchase shares of the Company, granting convertible note may help the company to:
- Delay issuing shares to an investor;
- Prepare and negotiate fewer documents compared to a traditional equity round; and
- Postpone agreeing on your startup’s valuation.
The Vietnamese Enterprise Law 2014 does not have specific regulations on the issues related to increasing charter capital through convertible notes. Thus, this matter will be mostly governed by agreements between parties. In practice, convertible notes are usually provided through a convertible note agreement signed between founders and potential investors. This type of agreement includes some following key clauses:
- Interest rate on the notes
- Discount on conversion
- Qualified financing threshold
- Cap on Conversion Valuation
- Maturity – Give yourself enough time to raise funding
- Conversion Events
- Conversion Price
- Exit Event
Convertible notes help founders and investors sidestep the friction of agreeing on a valuation for the startup. Note rounds can be shorter, simpler and faster than preferred stock financings. However, if the conversion to equity isn’t smooth, it can cause some real problems. Besides, the convertible note agreement is a complex type of agreement. Thus, it is advised that involving parties should hire lawyers/law firms to assist them on negotiating and executing this agreement.