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On PGs Talk: Super Angels Selling Fast
My understanding of convertible notes is a little iffy, so excuse me if I'm completely off base. But if it's a super angels goal for a company to sell fast, wouldn't the company also need to be profiting fast? And if it's profiting fast, wouldn't the company be able to pay off its interest, and therefore the super angel would never get any equity?
- pg 16y agoConvertible notes are only technically debt. They work like equity in an acquisition.
- colinsidoti 16y agoFair enough. But isn't it possible for a company to be profiting enough that they could pay off the debt before an acquisition? Especially in the case of a company being able to sell so quickly at a value 10x higher than the super angels valuation. Is it wrong to go into an angel investment with the hope of paying off the debt before it converts and keeping your equity?
- spydertennis 16y agoWhether it is wrong or not depends on the expectations of the investor when they fund. Given their usual incentives for investing it is generally wrong. http://www.quora.com/Can-you-raise-money-from-angels-but-then-not-use-it-and-return-it http://www.quora.com/Can-you-raise-money-from-angels-but-the...
- paulsingh 16y agoYes, in theory, you could pay the angel back upon note maturity (which would probably be principal + interest). However, most angels may not be too happy if that was your plan all along. They're putting money in on the hopes that your success will somehow multiply their money. If you're just planning to pay them back their interest, they might as well have put that same money into a bank. Again, it really depends on your angel -- my strong advice to you is to be forthcoming about your goals. It's better to have everyone on the same page up front... especially if you plan on having a long term relationship.
- netcan 16y agoI doubt they would sign a deal that leaves them open like that with handshake deal terms different from the on paper terms. Maybe the debt is only payable on demand. Can anyone post or point to a sample document?
- paulsingh 16y agoYou'd be surprised. :) I'll post a note term sheet that I raised money on last year once I find it but notice the prepayment clause here: http://startuplawyer.com/convertible-notes/convertible-note-term-sheets http://startuplawyer.com/convertible-notes/convertible-note-... When you're raising on a convertible note, you're essentially taking a loan from the angel. You're promising to "pay them back" at the next financing by converting their money into stock equal to the principal + interest they've accrued on that note. If you really wanted to (and the term sheet doesn't preclude a payback), you could pay them back for only their principal & interest instead of converting them to stock.
- netcan 16y agoI am :) I would be very interested if you could post that doc.
- staunch 16y agoI was curious about this recently, so I looked at a ton of convertible note agreements. Almost all (if not all) included provisions like "cannot be repaid without consent" and/or "elective conversion", which I think both protect the investor against this kind of problem.
- netcan 16y agoWhere did you get the agreements?
- colinsidoti 16y agoAgain, not an expert here, but isn't the option to pay off my debt one of the major reasons I prefer convertible notes over straight equity? And isn't it why I incentivize the angel with the option buy shares cheaper than the VC?