Side Note Incentive (Mis)Alignment has come Full Circle!
Most investors do not want to receive common stock, ever, so if you agree to a maturity date conversion provision youll have to come up with some type of preferred local sex free stock the notes would convert into at the maturity date. Thus because both startup and maturity date of a bond example investor usually have some leverage, generally a maturity date extension is agreed to at such a time.The letter was dated from London at eight o'clock in the morning.Convertible notes contain a maturity date provision at which point the notes are to be repaid with interest.6 date det.to ask smb. This added term opens the door for important questions that will have to be answered, including: (1) into which kind of stock will the notes convert at the maturity date? Well, in practice this just isnt very likely to happen what are the investors really going to foreclose on? The maturity date extension executed most, if not all, of the time.But because of this fear of being foreclosed on, one school of thought is that the convertible notes should automatically convert into equity upon the maturity date, and therefore convertible notes should be drafted with a maturity date automatic conversion provision (or worst case, such conversion. So, if you are a startup, dont agree to a convertible note maturity date conversion provision for the following reasons: Extra Negotiation and the Punitive, pre-Money Valuation, first, the maturity date conversion term will add an extra layer of negotiation to the convertible note process. .The simplest solution is simply an extension of the maturity date. .If you should need to cash it in early, there will be big penalties decreasing the payout.A close-up of car keys and auto loan paperwork.Increased Transaction Costs upon Conversion, the automatic maturity date conversion will end up costing the company a lot of money. .The church dates back to 1173.But this doesnt stop investors from trying to get a punitively lower pre-money valuation relative to an agreed-to price cap.Failure to make a payment can result in default whether you have one payment left.Otherwise, it could constitute an early termination of your lease agreement and you would typically be hit with extra fees which can sometimes be excessive.You Might Also Like: DFW Startup Community safe Update 2015.
(2) at what pre-money valuation should the notes convert at the maturity date?
Interestingly enough, it seems that we have come full circle on convertible note startup-investor alignment issues. .
Of course, theres always the one-off situation where convertible note investors act irrationally and sought to foreclose, but the startups mistake was likely the investors they chose, not the structure).
However, repayment of the notes upon the maturity date is usually not a great scenario for the company or the investors.