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It’s a perennial winner: “Controlling outside legal costs” is the top priority for corporate legal departments once again, according to the Legal Department Operations Index from the Thomson Reuters Institute.  

The good news is you don’t have to sort it out on your own. By using an industry-leading spend management system, you can streamline your efforts and realize significant savings.  

The need for a leading spend management system

Seasoned law department pros know that controlling outside counsel costs is complicated. You need strategies for keeping work in-house and efficiently using alternative legal service providers. You need a point-of-view on alternative fee arrangements versus the billable hour.  

And then you have your dealings with the law firms themselves. You often have less pricing information than your law firms do. And when it comes time to check that the bills match the agreements, you and your team are in a time crunch and can’t always spot the errors.  

Controlling spend has evolved into a sophisticated discipline within legal departments, with LDO leaders establishing best practices and working with the legal tech industry to align software capabilities to these approaches. Some of the best practices include making data-driven decisions, understanding the market rate for each type of matter in each region, getting standard timekeeper rates and reasonable rate increases, ensuring that your invoices match the billing guidelines.  

 

These thought leaders have helped technology companies develop best-in-class spend management systems that can save your organization significant time and money. And you don’t have to go it alone.  

 

Best practices in spend management

Leading legal teams have adopted several best practices to manage their spend effectively. These include the following:  

• Make data-driven decisions: Leading legal departments are leaning into using data to assess and improve all aspects of their operations. Spend management is no different. Having access to extensive and historical data for your own spending as well as for the rates and pricing practices of law firms in your area can help you make better decisions for your organization.  

• Understand the market rate: When timekeeper rates increase or you’re considering working with a new firm, you have traditionally been blind to market rates in your negotiations. Leading legal teams rely on systems that look at a vast pool of legal spend data to select, negotiate, and manage outside counsel.   

• Secure standard rates: Using your spend management system to set and maintain standard timekeeper rates for your outside counsel will help you with forecasting and budget control. The more variation in these rates, the more complexity you’ll have as you calculate your future spend. Using a leading spend management system will give you visibility into the current range of rates and provide benchmarking data to help you bring them all in line.  

• Ensure your invoices match the billing guidelines: Implementing ebilling and invoice approval automation will enable you to save time and reduce errors. You will eliminate paper approvals and automate currency conversion, timekeeper rate enforcement, expense compliance, and alternative fee arrangements. Leading legal teams use their systems to manage communication and invoice corrections with their outside counsel.  

 

Case study: Supporting cost control, growth, and innovation

Ohio-based AtriCure is a fast-growing company founded on innovation. The company’s legal team has adopted industry best practices and uses Thomson Reuters Legal Tracker Advanced for spend management and e-billing.  

Prior to implementing Legal Tracker, the team had no e-billing capability, and they tracked most billing and financial data manually. However, the company was growing fast, and the team needed to optimize and scale to support that growth. They implemented Legal Tracker to help automate tasks and solve major pain points, such as accelerating rate reviews, streamlining invoice review, and creating greater visibility over spend. 

Melissa Bodner, director of Legal Operations, reports that the team has:  

• Dramatically reduced the amount of time it takes to conduct timekeeper rate reviews 

• Used the data and insights to negotiate better rates with law firms 

• Streamlined forecasting and budgeting 

• Automated their invoice review 

“Essentially, Legal Tracker Advanced is paying for itself,” Bodner says. “It saves a huge amount of time. And the insights it gives us help us negotiate better rates with law firms.” 

 

A shorter path to your spend management goals

Managing outside counsel spending will continue to be a high priority area for in-house legal teams. The corporate counsel community is rallying around this priority. Working with industry tech partners, it has established best practices that can help your organization save significant money, be sure your rates match benchmarks, and validate that your invoices match your terms. 

By choosing a market-leading spend management tool, you are choosing a tool that puts you in line with these best practices and offers a shorter path to reaching your goals for controlling outside counsel costs.  

Legal Tracker Advanced from Thomson Reuters is the industry leader in spend management software. Find out how it can help your legal team better negotiate with and manage invoices from your outside counsel.  

 

 

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Legal terms • security • convertible note

Highlights:  Convertible notes are a type of debt instrument that can be converted into equity at a future date Often used by startups to raise early-stage funding Key terms include: principal amount, interest rate, maturity date, conversion discount, and valuation cap Can be advantageous for both startups and investors, but there are also some challenges and considerations to keep in mind

 

 

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SAFEs vs. convertible notes

 

In the fast-paced world where startups are booming, globalization and innovation are not just limited to the products or services on offer; rather, they are extended to how these will be funded. Among the many financing options available, one instrument that has emerged as a viable option among early-stage investors and entrepreneurs is convertible notes.

The United States market witnessed a remarkable increase in convertible notes in the first quarter of 2023. As per a Goldman Sachs, US companies have issued more than $40 billion of convertibles across 63 deals, from $29 billion and 54 transactions in 2022. The constant rise in the use of the convertible note suggests a stable demand, reflecting their attractiveness as a flexible financing option.

Convertible notes bridge the gap between debt and equity, is revolutionizing how startups secure funding and scale their operations at the same time they ensure that the investor is presented with better options. But what exactly is a convertible note, and why has it become so popular?

What is a convertible note?

According to Black’s Law Dictionary, a convertible note is:

“A security (usually a bond or preferred stock) that may be exchanged by the owner for another security, esp. common stock from the same company, and usu. at a fixed price on a specified date. — Also termed (specif.) convertible debt; convertible stock.”

A convertible note is a short-term debt instrument or agreement that converts from debt to equity at a future date, usually when one of three key events occurs:

• The company raises enough capital to reach a pre-determined benchmark.
• The term of the loan expires.
• The company is sold.

In simpler terms, the investors give loans to the startups in their early stage, at this moment the loan stands as a debt, but in the future the startup either pays back the loan amount with interest or, convert the loan into equity and becomes a shareholder in the company once it had time to mature and grow. The convertible note is like an agreement or contract which is negotiable by the parties to it, the agreement features the following:

1. Investor Rights
2. Amendments
3. Termination Terms
4. Repayment Terms/Conversion Terms
5. Partial Payment Option
6. Debt Guarantees
7. Use of Debt

A security (usually a bond or preferred stock) that may be exchanged by the owner for another security, esp. common stock from the same company, and usu. at a fixed price on a specified date. — Also termed (specif.) convertible debt; convertible stock.

Black’s Law Dictionary

 

What are the mechanics of a convertible note?

The convertible note purchase agreement (NPA) is the principal agreement between the issuer and the investors and sets out the price, terms, and conditions on which the investors agree to buy the convertible notes from the issuer.

Principal amount

Amount that has been invested by the Investor as a debt in the startup company is the Principal Amount, which acts as the loan’s face value.

Interest rate

Some convertible notes accrue interest on the principal amount when they are intended to be repaid as the loan (debt), although the primary benefit for investors generally lies in the conversion to equity rather than interest payments.

Maturity date

The date by which a convertible note must either be converted into equity or repaid with the interest accrued is the Maturity date.

Conversion discount

Conversion Discounts are offered to early investors which can range from 10% to 30% on the price per share during the next equity financing round.

Valuation cap

Valuation cap is the maximum company valuation limit at which the convertible note can be converted into equity, this is generally for protecting the investor’s interest from excessive dilution if the company’s valuation soars.

How are convertible notes advantageous for startup issuers and investors?

 

Issuer perspective

Convertible notes make it easy for startups to access early funding, which is required to establish the company. This allows startups to focus on growth and product development without getting down into traditional equity deals, ensuring they can scale efficiently and effectively.

Investor perspective

For investors convertible notes provide multiple benefits, such as it allows the investors to benefit from the conversion discounts and valuation caps if the startup raises equity at a higher valuation, securing more equity than through direct investment. On the other hand, it offers the mitigation of risk by the debt nature of the notes that is, if the startup fails to secure additional funding or becomes insolvent, then the investors can recover their investment as creditors.

What are the challenges and considerations for convertible notes?

1. If the company’s valuation cap is set too low, then there is a chance of dilution of founders and existing shareholders.
2. Convertible notes create uncertainty about the company’s future control and ownership, particularly when multiple notes convert simultaneously.
3. As it is well known that the process of traditional equity funds financing is complex, likewise convertible notes might not be that complex, but they still require careful legal drafting to ensure clarity on terms and conditions.

 

What is SAFE agreement and how does it differ from convertible notes?

A SAFE (Simple Agreement for Future Equity) is an agreement between an investor and a startup that lets the investor buy shares in the company later, usually during a future investment round. Unlike loans, SAFEs don’t have a set repayment date or earn interest, Investors don’t get shares right away but have the right to convert their SAFE into shares later, often at a discount.

Debt vs. equity

A SAFE is not a loan; it doesn’t have interest or a deadline for repayment. In contrast, a convertible note is a loan that earns interest and has a repayment deadline.

Complexity

SAFEs are simpler with fewer legal details, making them easier to manage. Convertible notes are more complex because they involve interest and repayment terms.

Investor risk

With a SAFE, investors may have to wait longer to get shares since there’s no deadline, but they don’t have to worry about the company not being able to repay. With convertible notes, investors have some protection because it’s a loan, but there’s a risk the company might not be able to repay or convert the loan if things go wrong.

Company preference

SAFE is preferred by companies that want to avoid the obligations of debt and the complexities of interest and maturity dates. Convertible Notes are often used when investors want the security of a debt instrument with the potential upside of conversion to equity.

Last thoughts and more resources

Convertible notes work like loans that earn interest and have a deadline for when they should either be repaid or turned into shares. This gives investors a clear idea of when they’ll get their money back or their shares, and it protects them from the risk of the company not paying back. Because of this, companies are motivated to get more funding or find an exit plan to avoid repaying the loan.

Convertible notes are a great choice for startups needing quick funding. They are flexible and save time since they don’t require complex equity discussions right away. For both startups and investors, convertible notes offer an efficient way to raise and invest money, making them a popular option for early-stage financing.

 

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The content appearing on this website is not intended as, and shall not be relied upon as, legal advice. Although this content was created to provide you with accurate and authoritative information, it was not necessarily prepared by attorneys licensed to practice law in a particular jurisdiction. This content was written by a writer with a legal background, but is not written by Practical Law attorney-editors. It is general in nature and may not reflect all recent legal developments. Thomson Reuters is not a law firm and an attorney-client relationship is not formed through your use of this website. You should consult with qualified legal counsel before acting on any content found on this website.