Ask YC/PG: Dilution and Convertible Note

[will_brown]

1. What are the terms, if any, relating to YC's potential dilution of ownership? (Specifically, is the 2-10% ownership from the initial investment protected by an anti-dilution provision)

2. Relating to the Convertible Note, do the founders sign a personal guarantee or are they protected from personal liability?

[pg]

We get diluted.

There is no personal guarantee.

[mmvvaa → pg]

The simplicity of this answer speaks very loud. Kudos to YC. All others should listen closely, and try to emulate it.

[tptacek → mmvvaa]

Are people in the real world signing personal guarantees as a condition of funding? That's not an investment; that's a bank loan.

[will_brown → tptacek]

Read the first two entries here: http://www.startupcompanylawyer.com/category/convertible-not...

The first entry explains the difference between Equity Funding(Give $x for y%) which you refer, and a Convertible Debt Note (can function just like a bank loan) which is what I reference. The second entry is specific to YC's Convertible Debt Note terms, but did not address my question.

[tptacek → will_brown]

This seems to be referring to torts related to breach of duty; when a company becomes insolvent, the fiduciary duties its directors owe to shareholders may transfer to creditors. In any case, these are suits in which a creditor alleges bad faith actions; a simple rule of thumb might be, if you go into business, nothing but insurance is likely to protect you from bogus tort claims.

It's something to be aware of, but not something that changes the fundamental nature of convertible note financing. Don't sign personal guarantees.

My question was more along the lines of, does anyone in the "real world" of startup financing ask for personal guarantees? Where is this actually happening?

[pg → tptacek]

I've never heard of it happening. Insisting on such a thing would be a great way for investors to filter out good startups.