Everything You Ever Wanted To Know About Convertible Note Seed Financings

Post by bonesinger » Sun, Apr 08, 2012, 1:56 PM UTC

ilamont wrote: post #7

I just had a conversation with a lawyer about this last week. We haven't gotten a quote, but it looks like it's going to cost a little more than $1000 for a template that I can use with different investors. Reading this article, the one thing that was new to me was the purchase agreement. Does anyone have any experience with this, in connection with a convertible note?

A purchase agreement is going to lay out the ground rules that the convertible note is going to be issued under such as who is buying the note, who is offering, the closing date, how to handle notices, what law will govern in certain situations, how litigation will be handled; most of these are categorized as representation and warranties by the issuer of the note. There also maybe Reps. and War. that the purchaser of the note must oblige by.

This is an extremely brief definition, and not to be taken as any legal advice.

Source: my 2 semesters in transactional practice and business planning. (I'm a law student!)

Post by bonesinger » Sun, Apr 08, 2012, 1:59 PM UTC

ww520 wrote: post #8

auston wrote: post #6

I'm very curious as to what happens when things go south with your company & you've got a Convertible Note that has not yet been converted.

Good question. I guess it would have seniority over shareholders (investors) in liquidating the company's asset. Assuming the company is a C corp, you should not be responsible for the debt personally.

It depends if the note was subordinated or not. Generally you have debt that is ranked based on seniority, so if the convertible note was a secured debt, it will rank higher than the unsecured creditors; however, it may still rank below other secured debt.

Example Ranking: Secured Debt 1 Secured Debt 2 Unsecured Debt 1 Unsecured Debt 2

In the case of bankruptcy, SD1 is going to be able to make a claim and get first dibs on assets and things to recover its debt. Everyone else has to wait their turn. (This is a super simplified definition)

LLC and C Corp liability is generally designed to shield you from personal liability. There are few cases where the shield of liability is "pierced" to go after the person who ran the company. "Piercing the veil" is what it is called, and it doesn't happen often, but when it does its a big deal.

I've seen a few cases in school about it, mostly about CEOs just running amok and stealing money, while having duties of good faith, loyalty etc...

Re: Everything You Ever Wanted To Know About Convertible Note Seed Financings

Re: Everything You Ever Wanted To Know About Convertible Note Seed Financings