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Your Sparring Partner In An Ever-Changing World

The world changes continuously. And technology accelerates these developments even further. In nature, all organisms must be able to adapt their habitat to survive. Therefore, the surviving organism is the one that knows how to adapt itself to changes in the environment in which it finds itself. What is true in nature also largely applies to organizations. As of the industrial revolution, organizations mainly focus on increasing production, material wealth and realizing economic growth. Organizations have, thus, come to see themselves as detached from the natural environment in which they operate and have started to organize themselves in an unnatural way. Policy choices based on purely technical considerations have subsequently become the center of interest, while simultaneously it is also of great importance to make full use of the available knowledge and skills, and be part of society at large in a sustainable way.

Investment support for your future-proof strategy

That is why I am keen on helping businesses and institutions to work out in detail what their short-and-long-term strategy entails. If the realization of that plan for the future requires raising debt and/or equity, I would gladly offer my expertise in support of that process. If the selected strategy makes an acquisition of a business with attractive synergies or other investment service imperative, the entire process could be part of my services as well.

Please contact Dr. Albert A. van Daalen for advice and support in Investment Services.

Convertible Debenture

What Is a Convertible Debenture?

A convertible debenture is a type of long-term debt issued by a company that can be converted into shares of equity stock after a specified period. Convertible debentures are usually unsecured bonds or loans, often with no underlying collateral backing up the debt.

These long-term debt securities pay interest returns to the bondholder like any other bond. The unique feature of convertible debentures is that they are exchangeable for stock at specified times. This feature gives the bondholder some security that may offset some of the risks involved with investing in unsecured debt.

A convertible debenture differs from convertible notes or convertible bonds, generally in that debentures have longer maturities.

Key Takeaways

  • A convertible debenture is a type of unsecured long-term convertible debt issued by a company, meaning that it contains a stock conversion option.
  • Convertible debentures are hybrid financial products that have some features of both debt and equity investments.
  • Investors earn fixed interest payments while the bond is active, and also having the option to convert it into equity if the stock price rises over time.

Convertible Debentures Explained

Typically, companies raise capital by issuing debt, in the form of bonds, or equity, in the form of shares of stock. Some companies may use more debt than equity to raise capital to fund operations or vice versa.

A convertible debenture is a type of hybrid security with characteristics of both debt and equity instruments. Companies issue convertible debentures as fixed-rate loans, paying the bondholder fixed interest payments on a regular schedule. Bondholders have the option of holding the bond until maturity—at which point they receive the return of their principal—but, holders may also convert the debentures into stock. The debenture can typically only be converted into stock after a predetermined time, as specified in the bond’s offering.

A convertible debenture will usually return a lower interest rate since the debt holder has the option to convert the loan to stock, which is to the investors’ benefit. Investors are thus willing to accept a lower rate of interest in exchange for the embedded option to convert into common shares. Convertible debentures therefore allow investors to participate in share price appreciation.

Special Considerations

The number of shares a bondholder receives for each debenture is determined at the time of issue based on a conversion ratio. For example, the company might distribute 10 shares of stock for each debenture with a face value of $1,000, which is a 10:1 conversion ratio.

The convertible debt feature is factored into the calculation of the diluted per-share metrics of the stock. The conversion will increase the share count—number of shares available—and reduces metrics such as earnings per share (EPS).

Another consideration for investing in unsecured debentures is that in the case of bankruptcy and liquidation they receive payment only after other fixed-income holders.

Types of Debentures

Just as there are convertible debentures, there are also non-convertible debentures whereby the debt cannot be converted into equity. As a result, non-convertible debentures will offer higher interest rates than their convertible counterparts since investors do not have the option to convert to stock.

Partly-convertible debentures are also a version of this type of debt. These loans have a predetermined portion that can be converted to stock. The conversion ratio is determined at the onset of the debt issuance.

Fully-convertible debentures have the option to convert all of the debt into equity shares based on the terms outlined at the debt issuance. It’s important that investors research the type of debenture they’re considering for investment including if or when there is a conversion option, the conversion ratio, and the time frame for when a conversion to equity can occur.

Benefits of Convertible Debentures

As with any fixed-income instrument, whether it is a bond or loan the debt it represents ultimately needs to be repaid. Too much debt on a company’s balance sheet can lead to high debt-servicing costs that include interest payments. As a result, companies with debt can have volatile earnings.

Equity, unlike debentures, does not require repayment, nor does it require the payment of interest to holders. However, a company might pay dividends to shareholders, which although voluntary, could be seen as a cost of issuing equity since the firm’s retained earnings or accumulated profits would be reduced.

Convertible debentures are hybrid products that try to strike a balance between debt and equity. Investors gain the benefit of fixed interest payments while also having the option to convert the loan to equity if the company performs well, rising stock prices over time.

The risk to investors is that there is little insurance in case of default if they’re holding shares of common stock. However, during bankruptcy liquidation, if an investor is holding a convertible debenture, the debenture holder gets paid before common shareholders.

Pros

  • Investors are paid a fixed-rate while having the option to participate in a stock price increase.
  • If the issuer’s stock price declines, investors can hold the bond until maturity and collect interest income.
  • Convertible bondholders are paid before stockholders in the event of a company’s liquidation.

Cons

  • Investors receive a lower interest rate compared to traditional bonds in exchange for the option to convert to stock.
  • Investors could lose money if the stock price declines following the conversion from a bond to equity.
  • Bondholders are at risk of the company defaulting and be

Real-World Example of a Convertible Debenture

Assume Pear Inc. wants to expand internationally for the first time to sell its mobile products and services. Investors are unsure if the products will sell abroad and whether the company’s international business plan will work.

The company issues convertible debentures to attract enough investors to fund their international expansion. The conversion will be at a ratio of 20:1 after three years.

The fixed interest rate paid to investors on the convertible debenture is 2%, which is lower than the typical bond rate. However, the lower rate is the trade-off for the right to convert the debentures into stock.

Scenario 1:

After three years, the international expansion is a hit, and the company’s stock price takes off rising from $20 to $100 per share. Holders of the convertible debentures can convert their debt into stock at the 20:1 conversion ratio. Investors with one debenture can convert their debt into $2,000 worth of stock (20 x $100 per share).

Scenario 2:

The international expansion fails. Investors can hold on to their convertible debentures and continue to receive fixed interest payments at the rate of 2% per year until the debt matures and the company returns their principal.

In this example, Pear got the benefit of a low-interest-rate loan by issuing the convertible debenture. However, if the expansion does well, the company’s equity shares would get diluted as investors convert their debentures to stock. This increase in the number of shares would result in a diluted earnings-per-share.

By James Chen in Investopedia

Please contact Dr. Albert A. van Daalen for advice and support in Investment Services.

How NDAs Work and Why They’re Important

What Is a Non-Disclosure Agreement?

To maintain a competitive advantage, businesses must keep working projects, innovative ideas, or exciting new products secret lest they fall into the hands of a competitor. Similarly, startup companies with a new and profitable idea can only succeed if what they are working on remains under wraps. A non-disclosure agreement, or NDA, is a legal document that keeps the lid on such sensitive information. These agreements may be referred to alternatively as confidentiality agreements (CA), confidentiality statements, or confidentiality clauses, within a larger legal document.

How Non-Disclosure Agreements Work

An NDA is typically put to use any time that confidential information is disclosed to potential investors, creditors, clients, or suppliers. Having confidentiality in writing and signed by all parties can lend trust to these sorts of negotiations and deter theft of intellectual property. The exact nature of the confidential information will be spelled out in the non-disclosure agreement. Some NDAs will bind a person to secrecy for an indefinite period of time so that at no point in time can the signer divulge the confidential information contained in the agreement. Without such a signed agreement, any information disclosed in trust can be used for malicious purposes or be made public accidentally. The penalties for breaking an NDA are enumerated in the agreement and may include damages in the form of lost profits or possibly criminal charges.

Uses of Non-Disclosure Agreements

Business owners often need to discuss proprietary or sensitive information with outside individuals. Sharing information is crucial when seeking investment, finding potential partners in a business venture, obtaining new clients, or hiring key employees. In order to protect the person or people with whom this information is shared, non-disclosure agreements have long been a legal framework to maintain trust and prevent crucial information from leaking out where it could undermine the profitability inherent to that content. Information that may require NDAs includes secret recipes, proprietary formulas, and manufacturing processes. Protected information also typically includes client or sales contacts lists, non-public accounting figures, or any specific item that sets one company apart from another.

For example, a start-up company seeking to raise money from venture capitalists or other investors may fear that their good idea will be stolen in lieu of receiving an investment. Having a signed NDA legally precludes such idea theft. Without one, it can be difficult to prove that an idea has been stolen.

A company hiring outside consultants may also require those individuals, who will be handling sensitive data, to sign an NDA so that they do not disclose those details at any point. Full-time employees may also be required to sign an NDA when working on new projects that haven’t yet been made public, as the effects of information leakage could damage the value of the project and the company as a whole.

What’s Not Included in an NDA

Of course, not all of a business’s dealings are meant to be kept confidential. Public records such as information filed with the SEC or the address of the company headquarters are not covered by an NDA.

Courts have leeway to interpret the scope of an NDA, depending on the language of the agreement. For instance, if one party to the agreement can prove they had knowledge covered in the NDA prior to its signing, or if they can prove they acquired the knowledge outside the agreement, they may be able to avoid a negative judgment.

Moreover, not all knowledge is protected in an NDA. If the information is revealed due to a court-ordered subpoena, the aggrieved party may not have legal recourse.

Types of NDAs

The particular content of each NDA is unique, as it will refer to specific information, proprietary data, or other sensitive details determined by the people involved and what is being discussed. Generally speaking, there are two primary types of non-disclosure agreements: unilateral and mutual.

A unilateral agreement is a contract that stipulates one party to the agreement – usually an employee – agrees not to reveal confidential information he or she learns on the job. The majority of non-disclosure agreements fall under this category. Though many agreements of this sort are intended to protect a business’s trade secrets, they may also be created to protect the copyright for information created through an employee’s research. Contract and corporate researchers in the private sector and professors at research universities are sometimes required to sign NDAs that give the rights to any research they conduct with the business or university that supports them.

On the other hand, a mutual non-disclosure agreement is typically executed between businesses engaged in a joint venture that involves sharing proprietary information. If a chip manufacturer knows about the top-secret tech going into a new phone, they may be required to keep the design a secret. In the same agreement, the phone manufacturer may be required to keep the new tech in the chip secret as well.

NDAs are also an essential part of negotiations for business mergers and corporate takeovers.

The Bottom Line

Non-disclosure agreements are an important legal framework used to protect sensitive and confidential information from being made available by the recipient of that information. Companies and startups use these documents to ensure that their good ideas won’t be stolen by people they are negotiating with. Anybody in breach of an NDA will be subject to lawsuits and penalties commensurate with the value of lost profits. Criminal charges may even be filed. NDAs may be unilateral whereby only the recipient of the information is required to keep silent, or mutual where both parties agree not to share each others’ sensitive information.

By Adam Hayes in Investopedia

Please contact Dr. Albert A. van Daalen for advice and support in Investment Services.

About Family Offices

What are Family Offices?

Family offices are private wealth management advisory firms that serve ultra-high-net-worth (UHNW) investors. They are different from traditional wealth management shops in that they offer a total outsourced solution to managing the financial and investment side of an affluent individual or family. For example, many family offices offer budgeting, insurance, charitable giving, family-owned business, wealth transfer, and tax services.

Key Takeaways

  • Family offices are full-service private wealth management services that serve just one or a small number of ultra-high-net-worth families.
  • Besides financial services, family offices also provide planning, charitable giving advice, concierge, and other comprehensive services.
  • Single-family offices serve one individual and their family, while multi-family offices serve a few families benefiting from economies of scale.

Understanding Family Offices

Some high net-worth individuals may want to consider opening a family office. A family office provides a wider range of services tailored to meet the needs of HNWIs. From investment management to charitable giving advice, family offices offer a total financial solution to high net worth individuals. In addition, the family office can also handle non-financial issues, such as private schooling, travel arrangements, and miscellaneous other household arrangements.

Family offices are typically either defined as single-family offices or multi-family offices–sometimes referred to as MFOs. Single-family offices serve just one ultra-affluent family while multi-family offices are more closely related to traditional private wealth management practices, seeking to build their business upon serving many clients. Multi-family offices are more prevalent due to economies of scale that allow for cost-sharing among the clientele.

The Many Disciplines of A Family Office

Providing advice and services for ultra-wealthy families under a comprehensive wealth management plan is far beyond the capacity of any one professional advisor. It requires a well-coordinated, collaborative effort by a team of professionals from the legal, insurance, investment, estate, business, and tax disciplines to provide the scale of planning, advice, and resources needed. Most family offices combine asset management, cash management, risk management, financial planning, lifestyle management, and other services to provide each family with the essential elements for addressing the pivotal issues it faces as it navigates the complex world of wealth management.

Legacy Planning and Management

After a lifetime of accumulating wealth, high-net-worth families are confronted with several obstacles when trying to maximize their legacy, including confiscatory estate taxes, complex estate laws, and complicated family or business issues. A comprehensive wealth transfer plan must take into account all facets of the family’s wealth, including the transfer or management of business interests, the disposition of the estate, management of family trusts, philanthropic desires, and continuity of family governance. Family education is an important aspect of a family office; this includes educating family members on financial matters and instilling the family values to minimize intergenerational conflicts. Family offices work collaboratively with a team of advisors from each of the necessary disciplines to ensure the family’s wealth transfer plan is well-coordinated and optimized for its legacy desires.

Lifestyle Management

Many family offices furthermore act as a personal concierge for families, handling their personal affairs and catering to their lifestyle needs. This could include conducting background checks on personal and business staff; providing personal security for home and travel; aircraft and yacht management; travel planning and fulfillment; and streamlining business affairs.

By Adam Hayes in Investopedia

Please contact Dr. Albert A. van Daalen for advice and support in Investment Services