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Our self-funding is running out within 2 months and we are probably a month to 4 months away from revenue. We hope we won't need financing, but we have to be prepared.

I've already spoken with a friend who is a qualified investor and who wanted to invest last year, however we deferred due to the distraction.

I would of course just prefer to take a loan out backed by a signed contract that we expect soon, but that is not a done deal.

The venture is two people - me and a partner. he works on this full time and I work on it part-time. We need to cover his living expenses for a few months.

That is the background. What we are looking for is a simple, fair convertible debt agreement for this investor. We are comfortable having him join us.

We don't expect to raise more investment money. There is a chance (though not the goal) that a competitor or customer will want to buy us/our IP later)

We are happy to either pay back the loan or to convert the debt.

Can anyone recommend any resources?

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4 Answers

up vote 3 down vote

Tim,

I presume you've already looked on docstoc.com - see for example, http://www.docstoc.com/docs/20456/Sample-Convertible-Note.

I'm not a lawyer (although I have worked on a lot of contracts closely with our lawyers), but my sense is that if you have a good relationship and you're all decent people (which I guess you can tell from past performance/contacts), then I would be tempted to write down exactly what you want to happen and then have your lawyer double-check it. (You're an engineer, right? Seems to me it's just like programming but in English.)

My fear with using a standard agreeement would be it all gets very complicated very quickly, and nobody quite knows where they stand without each having their lawyer explain it all in minute detail. Of course, this then gets very expensive and it also puts unnecessary strain on your relationships.

The only complication I can foresee is that this "rough" agreement is still in place when you come to get acquired. However, I think that would be a good problem to have - as you are being acquired, you will be spending money on lawyers like crazy anyway so this will be just one more thing to tighten up.

(Now I stand back and wait for the legal eagles to tear this to shreds!)

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up vote 1 down vote accepted

While not exactly what I need, these resources are pretty great - from an interview with Paul Graham on Mixergy: (thanks, Y Combinator)

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up vote 1 down vote

A good resource is OneCLE.com. There you will be able to research and modify terms from other contracts. Once on site search for "convertible debt agreement" and several examples will come up.

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up vote 1 down vote

All lawyers start with a template when it comes to convertible notes. There is no harm in having templates freely available and explained - it makes both parties more educated. The one problem with a lot of template services is that you have no idea if there are in fact standard or up to date (like a Docstoc), and there are not explanations of what each clause means.

That being said, there are few issues that you should consider when using a convertible note. They typically involve any sweeteners that you include in the note to reward your investors for taking on early risk. You can use them individually or a a combination of all three. Three common sweeteners are:

  1. A Discount
  2. Issuing Warrants
  3. Adding a Valuation Cap

Here is a good resource that explains the ins and outs of convertible notes that you should read prior to using a convertible note. It does a good job explaining these sweeteners. right now it is pretty common to see a discount with a valuation cap.

I found a couple good free convertible note templates that were posted on this Quora answer (I am not affiliated with Quora). Looks like the templates here just have use a discount.

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