TYPES OF SEED FINANCING INSTRUMENTS
The most frequently used instrument for raising modest amounts of capital at the seed stage is the convertible note. These are debt securities with the following characteristics: (1) the principal amounts are due at a maturity date; (2) they draw a fixed rate of interest on the principal balance; and (3) they provide a claim on the company's assets that is senior to all equity holders.
Many investors view these notes as deferred or unpriced equity in substance. The goal of their investment is to convert the notes into the same preferred equity that the company ultimately issues to its first institutional VC investors.
By contrast, simple agreements for future equity or SAFEs are a fairly recent addition to the seed financing toolkit. These are becoming popular alternatives to issuing convertible notes when a company is reluctant to issue debt for fear of reaching a maturity date before concluding the next round of financing. A SAFE is similar to a convertible note except it has no: (i) maturity date; or (ii) accruing interest.
BACKGROUND OF AUTHOR
Mr. Petrony graduated with a Bachelor of Arts degree, summa cum laude, from Youngstown State University. Subsequently, he obtained a law degree from the Ohio State University College of Law.
Mr. Petrony practices law at The Law Offices of John F. Petrony, LLC in Poland, Ohio. He maintains a transactional practice with a primary emphasis in the fields of business law and real estate law. The business law portion of his practice is comprised, in large part, of the following areas:
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