

On PGs Talk: Super Angels Selling Fast - colinsidoti

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?
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pg
Convertible notes are only technically debt. They work like equity in an
acquisition.

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colinsidoti
Fair 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?

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paulsingh
Yes, 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.

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netcan
I 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?

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paulsingh
You'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-...](http://startuplawyer.com/convertible-
notes/convertible-note-term-sheets)

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.

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staunch
I 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.

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netcan
Where did you get the agreements?

