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It's not a loan, it is the remainder of the investment.

Convertible notes are technically debt, and involve a commitment to repay. But the distinction is academic; the debt is a contract liability between the startup and its investors, and if the startup fails, there's nobody to repay.

You can't take a startup convertible note investment and use it to buy Porsches for the same reason you can't do that with an equity investment: it's fraud, and your shareholders/creditors will sue you personally.

One imagines the "founder fight" scenario Graham keeps alluding to is a startup that any outside can see has failed, but the founders can't; people are fighting over the right to continue being paid to work without a boss for X more months.

If you're a founder in this situation, you should know that this is probably the dumbest conceivable fight to get into. Your time is simply much more valuable than a few tens of thousands of dollars. More importantly, any game-changing idea you come up with after the team crackup is now encumbered by the original investors/creditors. Why would you want that? Get out as quickly and cleanly as you can and start over with a clean slate.

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