By Doug Bend and Luthien Niland

This article first appeared on Forbes

Startups seeking seed investment do what they can to entice investors, especially investors who are deciding whether to invest in your company or elsewhere.

One common method for raising seed funding is a convertible note, which is a loan from an investor to a company that has the upside of converting into equity if the company raises a certain amount of financing within a set amount of time. There are several reasons why the vast majority of seed stage investment rounds use convertible notes, including that it defers the valuation of the startup until a later round of financing and is a relatively inexpensive investment vehicle for infusing cash into a startup without a significant amount of legal time.

Our law group has helped close dozens of seed rounds for startups raising investment capital using convertible notes, and in the process, we’ve noticed that there are a few ways to “sweeten the deal” through convertible-note provisions—things investors may be looking for that could be effective bargaining tools for you.

Prepayment Only With Approval

Some convertible-note documents allow the startup to prepay. While this gives the company flexibility, it may not be attractive to investors who are aiming to hit a home run, rather than just interest on a loan.

An investor’s nightmare is to pick a winner, but the startup prepays the note before it converts and the investor misses out on the company’s upside. To assure a potential investor that this will not happen, you can offer a convertible note that may only be prepaid with the consent of the holders of at least a majority of the outstanding principal amount of the notes.

Favorable Investor Provisions

Early investors may be concerned that a startup will leverage their funding to grow confidence in the company, and then be in a position to offer later investors more favorable investment terms. Reassure investors that their early participation in the company will not put them at a disadvantage, and if the company offers better terms to other investors, they will also benefit from those terms with a provision that will automatically apply all favorable changes to the terms of the convertible note to all of the notes.

Cap On Conversion Price (aka the “Instagram Provision”)

Most convertible notes provide a 20 percent discount if the note converts into equity compared to the price paid by the next round of investors, to reward the risk taken by early stage investors.

However, if the company takes off, even after a 20 percent discount the seed-stage investment might not translate into a significant stake in the company. For example, a $25,000 seed stage investment in Instagram without a conversion cap would have translated into a very small equity stake, because the company was valued so highly at the next round of investment.

A conversion cap helps to align the incentives for the founders and the seed investors to seek as high a valuation as possible in the next round; without a cap, a seed stage investor’s investment will become worthless as the company’s valuation increases. By adding a conversion cap to the convertible note, your startup can tell investors that their investments will convert into a fair equity stake, and your investors will want the company to grow in value as much as possible.

Premium on Investment Upon Sale of the Company

Some convertible notes provide that an investor will be repaid only their investment amount plus accrued interest if the company is sold before the note converts. Similar to prepaying the note before it converts, investors may be wary of providing money to a startup as a loan rather than a potential high return investment.

To sweeten the deal, offer to include a provision that provides that the investors will get their money back with interest, plus a premium, if the company is sold before the note converts. Premiums are generally a multiple of the principal amount of the loan, i.e., 1.5 to 2 times the principal amount.

Hopefully offering one or two of these provisions to potential investors will make the investment more appealing while not disadvantaging your company too much. Every set of convertible note agreements is different, so you should consult with your legal counsel prior to including any of the above provisions.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.