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How To Turn That Promissory Note Into Stock

The convertible promissory note is a written contract entered into by two parties that agree and promise to pay to the holder of the convertible promissory note the principal amount as well as interest as provided in the terms of the note according to certain preconditions as defined in the convertible promissory note. The convertible promissory note is an agreement to repay a certain amount of money at a specified time or on demand and is also an enforceable promise of payment that may or may not include interest. In addition, the payments may be made yearly, monthly, weekly or in balloon payments.

There are certain terms that have meaning for the convertible promissory note and they include company, change of control transaction, conversion date, conversion stock, note conversion price, as well as note-holder. Company means the firm that promises to pay the note-holder a certain sum of money, with or without interest. The change of control transaction implies a merger, acquisition or other business combination in which half or more than half of the company’s voting stock gets transferred to different holders in a single transaction. Conversion date pertains to the date on which the note-holder exercises his or her right to convert the convertible promissory note into a conversion stock at the note conversion price. Conversion stock refers to shares of preferred stock. The note-holder refers to the person who is at the time a registered holder of the convertible promissory note.

The note can be converted at any time by the note-holder who has the right to convert principal and accrued interest in whole or in part into conversion stock at the note conversion price. It may involve surrendering the note for conversion at the principal offices of the company and should be accompanied by written notice of the choice of making a conversion. When the conversion of stock takes place, the company shall issue to the note-holder a certificate or certificates for the number of shares of conversion stock to which the note-holder is entitled to.

Basically, the convertible promissory note implies common stock that can be automatically converted into shares of common stock in case certain events were to occur. The terms and conditions laid out in the contract should address all aspects relating to the payment and enforcement of payment on monies accruing as a result of writing a convertible promissory note. For example, the convertible promissory note may specify that the failure to pay money owed shall be deemed as being a default and in such an instance the interest rate that is payable in respect of the note shall increase from the date when the default took place until such time as the default is satisfied or cured.

The convertible promissory note is an important contract that can be obtained from any of the various vendors who specialize in selling such documents. There are plenty of savings in terms of attorney’s fees as well as fees spent on drafting such a convertible promissory note from scratch and it makes good sense to spend the few dollars that such forms cost and obtain a ready to use and customizable convertible promissory note without any other headaches or inconveniences.

Wade Anderson is a CPA and operates
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