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TYPES OF SEED FINANCING INSTRUMENTS

In last month's Alert, we pointed out the most common types of seed round financing instruments.  We will now touch on the characteristics of certain of these 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:

  1. Business Sales and Acquisitions
  2. Mergers, Reorganizations and Conversions
  3. Commercial Transactions
  4. Limited Liability Company Law
  5. Corporate Law
  6. Business Formations
  7. Employment Law
  8. Franchise Law
  9. Internet Law
  10. Business Dissolutions
Mr. Petrony is a member of the following:

  • Ohio State Bar Association LLC Committee. This committee is responsible for drafting and amending Ohio’s LLC statute.
  • American Bar Association Committee on Partnerships and Unincorporated Business Organizations. This group participates in drafting model limited liability company and partnership legislation for use by the states.
  • Negotiated Acquisitions Committee of the American Bar Association. This committee, amongst other things, drafts model agreements for use in negotiating and documenting business acquisitions, mergers and reorganizations.
Lastly, Mr. Petrony frequently lectures on the topics of business law issues. He has presented seminars on behalf of a variety of local and national organizations, including, but not limited to, the National Business Institute and the Mahoning County Bar Association. Should you desire an in-house seminar on these issues to your group or organization, please let John know.

THE BUSINESS LAW ALERT IS INTENDED TO CONVEY GENERAL INFORMATION ABOUT BUSINESS LAW DEVELOPMENTS. THE ALERT IS NOT INTENDED TO BE, NOR SHOULD IT BE RELIED UPON AS, LEGAL ADVICE OR A LEGAL OPINION THAT CAN BE USED TO SOLVE INDIVIDUAL PROBLEMS IN ANY MANNER OR NATURE WHATSOEVER. MOREOVER, THE ALERT IS NOT AN OFFER OR SOLICITATION TO REPRESENT ITS RECIPIENTS, NOR IS IT INTENDED TO CREATE AN ATTORNEY/CLIENT RELATIONSHIP.

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