What is a Convertible Note?
A loan that can be converted into company shares instead of being repaid in cash, the investor often receives shares at a cheaper price (usually ~20%)
Original Issue Discount
OID is a “ghost fee.” If a note has a 15% OID, the company signs for $1.0M in debt but only receives $850k in cash.
What is Preferred Stock?
A hybrid security that looks like equity but acts like debt, ranking above common shares. Used by lenders because it avoids being labeled as debt while still giving them powerful rights over common shareholders.
What is Liquidation Preference? (Preferred Stock)
Preferred shareholders get paid first in a sale—often 1.5–2× their investment—leaving little or nothing for common shareholders.
What is a Full Ratchet Reset? (Preferred Stock)
When new shares are issued at a lower price, causing preferred shares to reset to that price, which causes major dilution for existing shareholders.
What is an ELOC (Equity Line)?
A highly toxic deal where a company sells shares to a fund at a discount (≈85–90% VWAP), causing ongoing dilution.
ATM (At-The-Market)
A facility managed by a bank. Shares are sold directly into the market at current prices without a predatory discount.
What are Pre-Funded Warrants?
Warrants with a tiny exercise price (usually $0.001), giving holders near-immediate access to common stock which creates instant tradable supply once registered.
What are Warrants?
Financial instruments giving the holder the right to buy company stock at a fixed price in the future. They can create future dilution when exercised.
What is a Soft Beneficial Ownership Blocker?
A toxic limit on ownership (e.g., 4.99% or 9.99%) that can be lifted months after, allowing the holder to exceed it and potentially take control.
What is a Hard Beneficial Ownership Blocker?
A limit preventing a holder from converting or exercising beyond a set percentage (e.g., 9.99%) under any circumstance, protecting existing shareholders from control concentration.
What is a Death Spiral?
A Death Spiral occurs when a convertible note has variable conversion pricing—falling stock prices trigger more shares to be issued at a discount, rapidly diluting existing shareholders.
What is the Absorption Formula in stock dilution?
It measures how quickly the market can absorb a large block of shares. In low-liquidity stocks, even a moderate shadow inventory can overwhelm the market, while high-liquidity stocks can digest massive share positions with little effect.
What is the Dilution Timeline in convertible deals?
- Deal Announced [8-K] – intent shown; shares reserved, not yet in float
- Registration Filed [S-1/S-3] – paperwork submitted to unlock shares
- EFFECT Declared – SEC clears filing; shadow inventory becomes tradable
- Selling Pressure Appears – lender starts dumping, price decline underway
What is a Leak-Out Agreement?
A clause limiting how fast a lender can sell. It prevents a crash but creates a multi-month ceiling, with constant selling pressure dampening rallies. Example: 5M shares ÷ 50K/day = 100 days of selling.
What is Series A stock?
Series A is the first class of preferred shares issued during a company’s first major venture capital round. It helps fund growth and scaling. Companies can issue subsequent rounds called Series B, C, etc.
What are restricted shares?
Unregistered shares owned by insiders, listed in the 10-K under ‘Unregistered Sales of Equity Securities’; usually eligible for sale after 6 months under Rule 144.
What is a float expansion?
A company registers new shares via S-1 or S-3 for immediate sale, adding to the active float. This sudden supply can overwhelm buyers and crush stock momentum.
What are structured capital providers?
Toxic firms providing alternative financing, structured to profit most often when the stock price falls. Features include discounted shares, bonus warrants, and protective terms that shift risk to existing shareholders.
What is variable conversion pricing?
The conversion price changes with the stock price, usually at a discount. Shares issued = $ ÷ conversion price, so lower prices = more shares. This can create a death spiral, depending on discount, floor, position size, and selling.
What’s the difference between a floor and floorless conversion price?
Floor: establishes a minimum conversion price, capping potential dilution.
Floorless: has no minimum, so conversions follow the market price and can issue unlimited shares if the stock drops.
What is Weighted Average Anti-Dilution?
is a mechanism that adjusts the conversion price proportionally based on new shares, their price, and existing shares, blending old and new prices to reduce dilution.
Institutional deals
Shares are typically priced at market or a slight premium, with warrants covering 50–75% at a 115–125% strike. Protection is a hard blocker capped at 9.99%, there are no resets, and the goal is to align investor returns with company growth.
Structured deals
Pricing is 10–20% below VWAP with a floor, warrants are 100% at a 100% strike, and protection is a waivable soft blocker. Resets use weighted-average anti-dilution to offer downside protection without harming the company.
