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I’ve been doing some research on the use of convertible notes for the purposing of financing our startup, BiggerPockets.com. If you’re also doing research on this financing option, I hope you find the info helpful — if you’ve got some great articles that you want to share, please do in the comments below.
Without further blathering, here are a few articles that I’ve discovered, followed by a key quote from that piece:
Assuming that you are planning on raising VC money some time in the future, there are two different typical structures for the first angel financing: (1) convertible debt and (2) preferred equity.
When your business is very young, raising a seed financing ($50K-$500K) via convertible debt is a great alternative to selling equity. Convertible debt is also known as a bridge loan since it ?bridges? the company to its next financing.
To boil it down, using the convertible debt method of financing with family, friends and angels essentially boils down to you saying, “I need money, and you have it. But I don’t know how much my company is worth, so let’s see if professional investors or the passage of time will set the value for us while giving you an upside that’s more in keeping with the risk.”
One thing to note: don’t personally guarantee angel notes. In that case, the calling of the notes will attach to the entrepreneur’s personal assets and may indeed incentivize investors to call their notes sooner than later.
The company could either (1) pay back the loan (which is unlikely since it is probably out of money), (2) ask the investors to extend the maturity date, (3) convert the loan into the last round of Preferred Stock (if any) at a pre-determined (i.e. last round) price (or price negotiated at the maturity date), or (4) convert the loan into Common Stock at a pre-determined price (or price negotiated at the maturity date). If the company can?t repay the note, then the investors could push the company into bankruptcy.
Pros: It is much cheaper to consummate a note deal, than a financing deal, which also means it is much quicker to close. Also, you don’t have to lock in a very low valuation today and if you do well the notes should convert into a higher valuation than they would have if you have done an equity deal.
For a convertible debt round, you can keep it as simple as issuing a promissory note for each investor. This promissory note can contain any special conversion terms, including what happens on a qualified financing (including the definition of the qualified financing), what happens on a sale of the company, and what happens if the company fails. You can do as many closings as you want by simply issuing a separate promissory note for each investor.
This is one of my biggest pet peeves. On almost a daily basis, I run into a situation where someone made a commitment to me, and didn’t live up to it. It is tiresome, annoying, and flat out rude. I don’t pretend to be perfect, and I’m sure I’ve made my share of commitments that I couldn’t keep, but we need to put this pattern of recklessness to a stop.
Just this morning, I can already count two instances where people made promises to me and failed to live up to them. The first one was for a weekly Friday morning meeting that we planned for brainstorming and masterminding — the other party has failed to show on three of three occasions (yes, I’ve already removed this from my calendar now) — and the other was from a writer who committed to provide articles to me weekly, but hasn’t in several weeks (and hasn’t responded to my emails, either).
If You Can’t Live Up to Your Commitments, Don’t Make Them!
I can’t tell you how many times I was really excited about doing business with another company and had to pass because we weren’t able to commit to executing on our side of the relationship. While at the time, these situations were disappointing to both us and the other party, in the end, being up front about it probably saved our reputation and relationships with those companies. I’m very aware of our capabilities and try to never make promises I can’t keep . . . I strongly urge others take the same direction with their businesses.
I just finished responding to a bunch of interview questions about community building from a good friend, and social media rockstar, Brett Borders. If you haven’t had the opportunity to check out his site before, I strongly recommend going through each and every post, and of course, when the interview is published, you’ll want to have a look at that as well. Brett is one of the smartest people in the social space, and I guarantee that you could stand to learn a thing or two from him.
In addition to social, Brett is a bonified expert in online reputation management. He publishes a blog focused on the topic called Online Reputation Edge, and if you’re ever need some help in that field, I strongly recommend you check it out or get in touch!
Charles Feldman – Crisis Management & Media Consulting
According to his website, “He has extensive experience as owner of a Beverly Hills based media consulting company in corporate, as well as individual media crisis management. Feldman has trained lawyers, doctors, corporate leaders and private citizens in how to best present themselves and their business/practice to the media.” Very few consultants have the experience in television, radio, print, and the internet, as do Charles.
Wrapping it up . . .
DISCLAIMER: I don’t get paid for referring these people to you.
Both have the experience and expertise to help you in the event that you need assistance with your reputation or crisis & media management. So, in the event that the shit hits the fan, you now know where to turn.
You can contact them on their sites, or follow Brett and Charles on Twitter.
Today was supposed to be a new beginning, but sometimes we have to deal with headaches from our past, and that appeared to be the case this morning, as I learned of a security hole that was causing bots to be able to spam parts of our site. The hole has since been closed, but I wasn’t planning on spending the first few hours of the day on that nonsense.
The Entrepreneur’s Life: Something ALWAYS Comes Up
If there is a lesson to be learned here, it is that no matter how well you plan things out, something will always come up to distract you. While many of these distractions can be ignored, often times you’ll need to re-prioritize your entire day/week/month as a result of others.
In my case, the loss of my developer this week means that everything else that I had planned to do has to be put on hold. We had some exciting upgrades to BiggerPockets planned, and unfortunately, they will need to wait until we can get someone new in house to execute. I was also working on some business deals, and these too must be put on hold for a short while until the number one priority – hiring – is complete. Of course, I’ve always got my backups, but it gets rough when you go through a period like I’ve had recently, with the loss of several developers over a short period of time. Then again, that’s how it often goes when you’re working with contract workers.
This is not something new for me. Dealing with unforeseen circumstances is the story of the last five plus years of my life, but if you’re an upstart entrepreneur, you better make sure you’ve got the ability to deal with such events, because they come up often.
Forward Planning: Plotting the Future of a Company
I’m planning on spending some time over the next days in linking up with other entrepreneurs to get a better idea of what size team to plan for when we start building things up. I’ve got a pretty good idea of our needs, but of course, it would be great to see what the experiences of those people who have been through the capital raising phase after bootstrapping are; most folks I know started their companies with financing . . . I’m in an altogether different place with a live, revenue generating and profitable business.
Here are some good reads I’ve found regarding team building as it relates to getting your startup off the ground:
According to Wikipedia, catharsis means a “cleansing”, “purging”, or “clarification.” I hope that today’s catharsis marks a new beginning for myself and my company, BiggerPockets.
With that in mind, I hope to share the journey moving forward with the rest of you.
I’ve ignored this blog for a long time, and I’ve really come to miss having a place where I can share great tips, tools, resources, and other info, as well as having a place to vent, and to let everyone know what it is that I deal with while running the business.
Moving Forward
This year started off with a bang, and along the way there were a few bumps in the road, followed by some boulders and a few mountains. I’m not going to get into the details, but just know that from today forward, the plan is to smooth out the road once again.
The first step in moving forward is to find a new ruby on rails developer for BiggerPockets. If you’re a coder or know of one, please check out the job description and shoot us your resume. Otherwise, the plan is to get working on the plan.
Simply put, I’ve been bootstrapping the business for long enough. The time has come to raise some capital and to take things to the next level. I hope to take you along with me on my journey.
Here is a list of the 5 best webmaster forums that I continue to refer to when seeking information about websites, SEO, marketing, etc.; all of these forums are great communities! Be sure to bookmark them if you’re not doing so already!
This is one of my biggest pet peeves. On almost a daily basis, I run into a situation where someone made a commitment to me, and didn’t live up to it. It is tiresome, annoying, and flat out rude. I don’t pretend to be perfect, and I’m sure I’ve made my share of commitments that I couldn’t keep, but we need to put this pattern of recklessness to a stop.
