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Forcing startups into bankruptcy using convertible note?

In the case the principal and/or interest becomes due, and the startup can’t pay, the note investor usually converts to equity. Alternatively, can he force the company into default if he refuses convert? - effectively taking control of the assets / IPs?

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I’m sure there are legal clauses that protect the companies from this sort of activity. 

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bankruptcy lawyer. lol

I love my cheese. I got to have my cheddar.

convertibles usually have less power in terms of forcing companies into bankruptcy than traditional bonds. often convertible notes are more like equity already, convertible to equity at crappy conversion rates. i’ve seen a few times, just before a reorg, where convertible bonds will trade at 5 cents on the dollar while senior debt trades at 90 cents on the dollar as the convertible debt is converted into equity THEN reorg’d as per the senior bond takeover of the company. convertible debt is a crappy asset class. it works fine during a bull market but full cycle, beware, and read your prospectuses very carefully.

^o lol. thats shady! i never thought of how they can force those conversions on you.

I love my cheese. I got to have my cheddar.

Interesting - how does it have less power than a traditional bond? How would the language in the contract differ?

typically it is unsecured/subordinated debt versus secured/unsubordinated senior debt. unsecured convertible debt is often introduced as first lien but then eventually takes a back seat to senior secured debt when senior secured debt is issued.

every situation will be different but seniority for each company is usually very clear.

SAFEs please! funny the acronym is contextually appropriate for founders in MOST cases.

MLA - It’s very unlikely a start up will have senior secured debt. 

As a convertible shareholder, you wouldn’t want to convert to equity as equity would be worthless upon lack of ability to pay off debts which is why, like MLA is saying, convertible debt would trade at a massive discount to par since a portion of it’s par value is the option to convert to equity

You could, however, have debt-like securities with covenants that could force return of par value if a payment is missed.  If missed, debt holder takes ownership of the company.  .

Given that immature companies have negative cashflow, debt is not utilize to fund their business and instead equity is issued which does not have the burdens mentioned above.

Galli wrote:

MLA - It’s very unlikely a start up will have senior secured debt. 

As a convertible shareholder, you wouldn’t want to convert to equity as equity would be worthless upon lack of ability to pay off debts which is why, like MLA is saying, convertible debt would trade at a massive discount to par since a portion of it’s par value is the option to convert to equity

You could, however, have debt-like securities with covenants that could force return of par value if a payment is missed.  If missed, debt holder takes ownership of the company.  .

Given that immature companies have negative cashflow, debt is not utilize to fund their business and instead equity is issued which does not have the burdens mentioned above.

of course you can’t have traditional senior secured debt when there isn’t yet an asset to secure against… :P though it is possible for small companies that are big enough to have convertible debt to have a line of credit secured against the assets of the company so that line of credit could push the young company into bankruptcy. …