Comments on: What does a convertible note bridge financing term sheet look like? http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/ Venture capital, seed financings, convertible note bridge debt, M&A, option vesting and other matters explained for founders and entrepreneurs Fri, 19 Mar 2010 08:24:58 +0000 http://wordpress.org/?v=2.9 hourly 1 By: Castor66 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-3007 Castor66 Thu, 24 Dec 2009 10:49:34 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-3007 Yokum,<br><br>My situation is similar to Charliehatfield's as described above - I'd like to do seed financing from family and friends, and want to structure it as convertible debt.<br><br>Prior to considering convertible debt though for the friends/family financing, I've been leaning towards the LLC as the company's legal structure. Can you help me understand why you don't typically do financings of LLCs? <br><br>It seems to me that if I'm dealing with friends and family, and am not going to do a 2nd round of financing, it'd be nice to stay with the LLC structure and therefore still have liability protection, while avoiding corporate income tax.<br><br>If I need to be talked out of doing this as an LLC, I'd just like to understand the reasons why - as the best of both worlds scenario I envision is keeping the LLC and doing convertible debt financing.<br><br>Thanks,<br><br>Josh Yokum,

My situation is similar to Charliehatfield's as described above – I'd like to do seed financing from family and friends, and want to structure it as convertible debt.

Prior to considering convertible debt though for the friends/family financing, I've been leaning towards the LLC as the company's legal structure. Can you help me understand why you don't typically do financings of LLCs?

It seems to me that if I'm dealing with friends and family, and am not going to do a 2nd round of financing, it'd be nice to stay with the LLC structure and therefore still have liability protection, while avoiding corporate income tax.

If I need to be talked out of doing this as an LLC, I'd just like to understand the reasons why – as the best of both worlds scenario I envision is keeping the LLC and doing convertible debt financing.

Thanks,

Josh

]]> By: Yokum http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2961 Yokum Wed, 09 Dec 2009 05:26:37 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2961 @Kitty - you need to engage an attorney to deal with your questions. @Kitty – you need to engage an attorney to deal with your questions.

]]> By: Yokum http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2939 Yokum Tue, 08 Dec 2009 22:26:37 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2939 @Kitty - you need to engage an attorney to deal with your questions. @Kitty – you need to engage an attorney to deal with your questions.

]]> By: kittygiusio http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2935 kittygiusio Thu, 26 Nov 2009 11:29:54 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2935 so if i want to isue a convertible note to an investor, i need this document as well as a note Purchase Agreement? So I need two (2) documents to accomplish this? ie secure this financing?<br>Thanks!<br>Kitty so if i want to isue a convertible note to an investor, i need this document as well as a note Purchase Agreement? So I need two (2) documents to accomplish this? ie secure this financing?
Thanks!
Kitty

]]> By: Yokum http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2916 Yokum Mon, 09 Nov 2009 05:52:17 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2916 @Zack - Whether the interest is converted or not is a negotiable point. Typically, the interest is also converted, but occasionally, some investors prefer to have the interest paid in cash at conversion. @Zack – Whether the interest is converted or not is a negotiable point. Typically, the interest is also converted, but occasionally, some investors prefer to have the interest paid in cash at conversion.

]]> By: Zack http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2915 Zack Sat, 07 Nov 2009 18:01:47 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2915 Yokum -- Thank you so much for the amazing website. There is so much great information here. <br><br>I have a follow up question about the interest rate on the convertible note. I understand that for an early stage non-cash flowing business the interest would usually not actually be paid and would simply accrue. My question is, does the accrued interest get included in the amount that gets converted? <br><br>That is, if there is a $100k convertible note with a 10% interest rate and a 20% discount on conversion. If the conversion happens after 1 year at $1/share. I understand that the 20% discount means the convertible noteholder would get to convert at $0.80/share. My question is, does s/he get to buy $100k worth of shares or $110k worth of shares (e.g. the note amount + accrued interest) at $0.80/share? Or is the accrued interest only payable if the note reaches maturity and does not convert ?<br><br>It seems to me that, if the convertible noteholder converts the amount including the accrued interest that the interest rate would still be very relevant. Am I missing something ?<br><br>Thanks again. This is the first time I've had the guts to write you a question/comment but I love your site! =) Yokum — Thank you so much for the amazing website. There is so much great information here.

I have a follow up question about the interest rate on the convertible note. I understand that for an early stage non-cash flowing business the interest would usually not actually be paid and would simply accrue. My question is, does the accrued interest get included in the amount that gets converted?

That is, if there is a $100k convertible note with a 10% interest rate and a 20% discount on conversion. If the conversion happens after 1 year at $1/share. I understand that the 20% discount means the convertible noteholder would get to convert at $0.80/share. My question is, does s/he get to buy $100k worth of shares or $110k worth of shares (e.g. the note amount + accrued interest) at $0.80/share? Or is the accrued interest only payable if the note reaches maturity and does not convert ?

It seems to me that, if the convertible noteholder converts the amount including the accrued interest that the interest rate would still be very relevant. Am I missing something ?

Thanks again. This is the first time I've had the guts to write you a question/comment but I love your site! =)

]]> By: Yokum http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2913 Yokum Thu, 29 Oct 2009 05:36:03 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2913 @charlie,<br><br>1. In my practice, we typically do not do financings of LLCs. The concept of a convertible note doesn't map over well into an LLC. Generally speaking, convertible notes are the preferred mechanism from the company's perspective for an early stage angel financing.<br><br>2. The convertible note does not need to be filed anywhere. There may need to be securities law filings, however. @charlie,

1. In my practice, we typically do not do financings of LLCs. The concept of a convertible note doesn't map over well into an LLC. Generally speaking, convertible notes are the preferred mechanism from the company's perspective for an early stage angel financing.

2. The convertible note does not need to be filed anywhere. There may need to be securities law filings, however.

]]> By: charliehatfield http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2912 charliehatfield Thu, 22 Oct 2009 20:14:15 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2912 I have a LLC company and want to do a friends and family round of investing. Do you usually use a convertible note for Friends & Family if not what method do you recommend. Second, does the convertible note need to be filed with the state or some governing body? I have a LLC company and want to do a friends and family round of investing. Do you usually use a convertible note for Friends & Family if not what method do you recommend. Second, does the convertible note need to be filed with the state or some governing body?

]]> By: Zack Steven http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2578 Zack Steven Mon, 27 Apr 2009 21:04:25 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2578 Thanks so much for posting this. Very helpful! Thanks so much for posting this. Very helpful!

]]> By: Yokum http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/comment-page-1/#comment-2445 Yokum Mon, 13 Apr 2009 05:09:57 +0000 http://www.startupcompanylawyer.com/2007/04/27/what-does-a-convertible-note-bridge-financing-term-sheet-look-like/#comment-2445 @Kevin - Convertible note investors get whatever registration rights the investors in the preferred round get. Yes, the note holders need to agree to sign the same documents as other investors in the preferred round. @Kevin – Convertible note investors get whatever registration rights the investors in the preferred round get. Yes, the note holders need to agree to sign the same documents as other investors in the preferred round.

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