Tag Info

It's because a convertible turns into pref shares, or at least some pref shares, at the company's next financing event, usually a Series A round. As soon as those pref shares come into existence, S-Corp status is gone. It is theoretically possible to have a convertible that converts to common stock, but that means the valuation event that triggers the ...

Although there are some well founded criticism against convertible notes, if they're insulted, the angels you've talked to are clearly behind the bandwagon. Paul Graham, arguably the most influential person in the world when it comes to seed financing, seems to have declared Convertible Notes the winning trend. Perhaps you need to educate your angels? Kindly ...

Do realize that "There are lots of chances that the company will be funded in 2-3 months" should really be "there is a good chance that the company will not get any funding until another year of hard work, if ever" I'm not sure what they mean by convertible note. It's usually for investors who sign a check to the company, but instead of getting stock right ...

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 ...

I believe this is more a business question than a legal question. From the legal perspective, there is not a huge difference between converting to shares of a corporation vs. converting to LLC units or membership interests. The business difference is that many investors insist on investing in corporations rather than LLCs. Disclaimer: This post does not ...

If you know that you're doing a larger round soon, then try doing no cap, but with an aggressive discount rate. We had good success with these, and it sets the scene clearly. $30k @ 15% interest & 30% discount, then $75-200k @ 12% interest & 20% discount Getting into caps at this stage my really mess you over - you have no idea what your Series A ...

My advice: hire a lawyer. Spend your time thinking about customers and product. It won't be expensive and you can talk to multiple lawyers to find one you like. You can ask if they will "defer fees", which means you don't pay until your convertible round is closed. You might also be able to ask them to do the round at a flat rate, since convertible rounds ...

Whether it's equity or debt is an issue to resolve among the founders. The basic issue is this: if the company decides to fold, does the investing founder get paid his $100K back first before any of the other founders see anything? If so, then it's debt. If not, then it's equity. I think most companies would do that deal as stock. ASsuming you're ...

A convertible note suggests that the company will consider your deferred compensation as a debt the company owes you. You would be in the same position as an investor who contributed cash to the company in exchange for a convertible note. Typically, a holder of debt is considered to be in a more favorable position than a holder of equity, because a creditor ...

(1) Beware of tax issues. If the company gives you something, including a convertible note, as compensation for your services, and that thing has an ascertainable value, you will be taxed on it. Not really what you want -- nothing like getting a $20K convertible note that you can't sell, and then having to pay $5,600 in taxes on it. (Also check into ...

Let's start from definitions: Convertible note or bond Stock Option If you are given an option of Convertible Bond or a Stock Option I would get Convertible Bond. Convertible Bond being a bond carries interest albeit lower then a regular bond but interest nontheless which the company will have to pay depending on how they will set this up.

Typically, convertible notes have a 20-50% kicker to the Series A round. When you do a Series-A, everything will convert to the Series-A price. You can do a conversion at a certain evaluation but that probably won't fly with a savvy investor. The best thing to do would be to convert everyone to the Series-A once you raise enough money. That way, it's a ...

It all depends on the note and the buy back clause. Most convertible notes have a buy back clause for just such a purpose. As far as I know, there is no law about how to buy it back -- it's really up to the two parties and the contact they signed. If you really want to buy it back, then the best thing to do is talk to the investor and figure out a deal.

There is also the issue of number of shareholders. Don't forget that sub-S corps can only have up to 100 shareholders, so if you issue convertible notes, and the option to convert to shares of common stock is exercised, the holders of those notes might push you over the 100 shareholder limit. Interesting if the notes become publicly traded as some kind of ...

It's a good rule of thumb to make the convertible note rate be above the 10-year treasury note rate. There is a law about charging too little interest on a bridge loan but I don't recall the specifics. The rate I have typically used is 5%. The 10-year T-note is at 3.71% as of the 12th. It's best to be on the high side of the interest rate just so you don't ...

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 ...