Strictly Business

A Business Law Blog for Entrepreneurs, Startups, Venture Capital, and the Private Fund Industry.

Startups Archives

Why Startups Use Convertible Notes

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Convertible Notes

For the past 10 years or so, founders of early-stage startups have been increasingly turning to convertible notes and convertible equity instruments to structure investment rounds, particularly for their first capital raise. While some in the angel investment community have argued that it would be best if founders did fewer convertible note rounds and more equity deals, it’s important to consider why the convertible note structure has made such a big splash in early-stage financing world in the first place. What are the primary benefits for founders and their investors to opt for a convertible note offering over a stock offering? In future posts, we will consider the key deal terms to consider for your convertible note offering but first let’s look at the key benefits of the convertible note structure to determine if it is right for your company.   

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Negotiating a Convertible Note Financing

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convertible note financing A convertible note is a hybrid of debt and equity, and it’s a popular form of financing for two main reasons. First, convertible notes are generally easy and cost-effective, because they require little negotiation and paperwork. Second, they allow the parties to put off valuation until a later time, which is useful, because accurately valuing a new company from the outset can be difficult.

Before you venture into a convertible note financing, it’s important to have a strong grasp of the terms of the note and how it will convert to equity.

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The Pros and Cons of Taking Venture Capital Money

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Business man, student or teacher pulling money from a magic hat on blackboard backgroundIn many ways, the dilemma of deciding whether to take venture capital money from an interested VC firm can be filed under “Good Problems to Have.” The majority of startups never get to this point, either failing outright, or, even if they are profitable, they simply never build the type of company profile that fills VC investors’ imaginations with visions of high returns. But for those businesses that, through a mix of hard work, innovation, and luck, have reached the point of attracting the attention of VC firms, the decision of whether to take their money is still a hugely important one, and one that comes with high risks and high rewards. Below, I’ll cover a few of the primary pros and cons of taking venture capital investment that you’ll want to have in mind as you work through this stage of your company’s life growth. [Read more…]

The Pitfalls of Moonlighting in a Day Job for Startup Founders

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Many, if not most, founders have difficulty being able to afford to work full-time for their startup right from the start. But working in a day job while moonlighting at your venture presents some particularly dicey legal issues that can cause issues down the line.

In particular, moonlighting for your startup presents a significant threat to your startup’s intellectual property, especially if you’re currently working at a technology company. Many employers, especially technology companies and other IP-intensive businesses, require all employees to sign invention assignment agreements, which are often very broad and give your employer rights to any IP you create that relates to the business of your employer or any reasonably anticipated business of your employer. This is the case even if the IP was created on your own time and without the use of your employer’s facilities. [Read more…]

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