A Convertible Bond is a short-term debt that converts into equity in conjunction with a future financing round. Convertible Bonds are bonds that can be converted into shares of the issuer at the discretion of the lenders. The lenders would receive equity in the company instead of principal plus interest like normal loans. Purposes and benefits A Convertible Bond allows the investor to participate in the upside of an issuer upon IPO or increase in the value of the issuer's shares. It is less risky than buying the stocks outright as investors can hold onto the bonds as a debt instrument should there be no listing or the share price went down. Bondholders also have priority over shareholders in the event of insolvency or liquidation. The value of the Convertible Bonds would be equivalent to that of a typical bond plus an option to purchase the stocks. As it is a hybrid between stocks and bonds, Convertible Bonds typically offer higher yields than stock but lower yields than typical bonds. Legal documentation required Term sheet: This should serve as a summary of the key terms of the agreement between the company and the investors. This is signed at the start of the transaction and before commencing detailed due diligence conducted by the investors. Subscription agreement: This document is a contract between the company and the investors which entitled an investor to subscribe for a convertible bond. This agreement should include how the debt is converted into equity, the discount rate and the valuation cap. Convertible bond certificate: This is a deed which confirms the purchase of the convertible bond and is a written promise to repay the debt at a specified time by issuing shares. What is the difference between a convertible bond and a SAFE? Check out our guide on What is a Simple Agreement for Future Equity (SAFE)? Both convertible bonds and SAFEs are converted into equity in a future priced equity stage, and both

A Simple Agreement for Future Equity (SAFE) is an agreement between a company and an investor that grants an investor the right to obtain equity at a future date if the company sells shares in a future financing. SAFE is a financing contract that start-ups can use to incentivise employees or to raise funds in seed financing. The basic idea is that the holder of SAFE is an early employee/ investor whose stake in the company will be based on the valuation in the future pricing round of the company. For more information, check out our guide on Employee Share Scheme / Options / SAFE / Incentives. Mechanism of SAFE A SAFE is used where the investor agrees to pay for a certain amount for shares that may be issued to him/her at a later point in time. The shares are usually issued on the occurrence of a trigger event such as Future equity financing or Sale of the company. The previously invested money will then be converted into the corresponding number of shares based on either a Discount or a Valuation Cap (to be explained later) A SAFE is a contract between the investor and the company and should contain the following points: The definition of a triggering eventHow the number of shares an investor is entitled to is calculatedInvestors right to vote and receive dividends (if any) Governing law and jurisdiction This instrument will expire and terminate upon the triggering events. A binding and enforceable SAFE should also be drafted accurately to reflect the parties’ intention and prevent unnecessary dispute. Check out our Simple Agreement for Future Equity template. Example Investor A invests HKD10,000 through a SAFE, the company will utilize that money to start the business. It is unquestionable that HKD10,000 will not get the company very far. After some progress has been made, the company may want to raise more funds to take the company up a notch, that is when the mechanism of SAFE comes into play. Let’s say investor B

Company financing is one of the major concerns for operating any business. Debt financing and Equity Financing have been the two types of financing options that are most commonly sought after by companies in Hong Kong and around the world. Equity Financing Equity financing means someone is putting money into the business in return for ownership in the company. Apart from the ownership rights, equity investors also get parts of the future profit of the business. How? An advertisement and invitation to acquire shares of a company to the public are prohibited unless: It complies with the prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance; and It has been authorised by the Securities and Futures Commission of Hong Kong (SFC) under the Securities and Futures Ordinance (SFO). Instead of an offer to the public, a small and medium enterprise can raise funds by way of Private Placement which is subject to less regulations than an offer to the public. A Private Placement means an offer which: made to no more than 50 persons the total consideration does not exceed HK$5,000,000the minimum principal amount to be subscribed for is not less than HK$500,000 A Private Placement must contain an appropriate warning in the form stipulated by the Company Ordinance. Besides, there should be no advertisement and press release regarding the offer and each offer document should be individually addressed to specific offeree and state clearly that it is not an offer to the public. Advantages No obligation to pay dividends on equity Experienced investors can provide the company with valuable insights No negative repercussions even if the company loses all the investor’s money Reducing reliance on debt and improving financial health of the business Disadvantages Giving up a portion of ownership and control of the company Attracting investors can be harder than getting a loan since equity

Apart from getting funds from banks or investors, start-ups and small businesses can check out the funding schemes or grants set up by the Hong Kong government. Both funding schemes and grants are sums of money given to a business in order to help them further their business, promote innovation and/or support different industries. Companies are usually not obliged to at a later stage pay back the money so long as they meet the requirements and conditions set out under the grant. Different types of Funding Scheme The Hong Kong government has initiated a number of funding schemes for enterprises and organisations across different industries. Here are some of the most sought after schemes: SME Financing Guarantee Scheme is a fund which helps SME and non-listed enterprises obtain financing from participating lenders for meeting business needs.The SME Export Marketing Fund (EMF) is a fund which focuses primarily on marketing or promotion activities. It strives to provide financial assistance to SMEs for participation in export promotion activities, hoping to encourage them to expand their markets outside Hong Kong.The Innovation and Technology Support Programme (ITSP) supports research and development (R&D) projects undertaken by designated local public research institutes and R&D Centres.The Patent Application Grant assists local companies and individuals to apply for patents of their own inventions to capitalise their intellectual work. The Hong Kong government has also set up the SME Loan Guarantee Scheme (SGS). Instead of providing fund/loan directly to a SME, the Government will act as a guarantor to provide loan guarantee to SMEs to help them secure loans from participating lending institutions for acquiring business installations and equipment or meeting working capital needs of general business uses. For more information on other funding schemes set up by the Hong Kong government, Please click here. Timely and truthful declaration An

Funding is so important when it comes to running a business. Raising funds for a start-up or a SME may feel like a daunting task, this article aims to provide you with different ways you can go about seeking funds and what legal documentations are needed respectively. After reading this, you will also find out the advantages and disadvantages of different forms of funding so you can choose the most suitable one for your business! 1. Friends and Family Friends and family are usually the first source of financing for many young businesses. This type of funding can come as a gift, a loan or in exchange for shares of the company. ProsConsUsually interest-freeThe process is not as complicated as other forms for fundraisingThis may pose an adverse effect on one’s personal relationships 2. Small Business Loans A Small Business Loan, also known as a SBA Loan, is a fixed amount of funding given to a small business in exchange for repayment of the loan principal amount plus interest. A small business or a start-up can get a small business loan from an investor, a bank or any qualified money lender. Like regular loans, the amount of funding available and the interest rate are dependent upon the credibility of the company. With more solid financials, a company can expect to obtain a bigger loan with a lower interest rate. In Hong Kong, a loan can be given by an authorized money lender or a bank. A company if wishes to borrow money should enter into a Loan Agreement with a lender. A loan agreement operates as a contract between the borrower and the lender and will stipulate the followings: Whether this is a secured or unsecured loanPrincipal amountInterest rateAny conditions to be fulfilled before the loan becomes available to the companyDates for repaymentObligation of borrowers and lendersGoverning law of the contract For more information, check out our Commercial Loan Agreement template, please be reminded that in case of a secured loan,