"I have a successful growing business, to the point where a number of investors are starting to knock on my door.
"My business is in a limited liability company (LLC), with two classes of membership interest -- voting and nonvoting. I did this on the advice of my lawyer and my accountant, who both suggested it was useful to distinguish between the founders of the company (they, of course, get voting interests) and investors (who get nonvoting interests).
"I have approached a number of investors (actually, they have approached me) and offered them nonvoting interests for a significant percentage of the company, but they are dragging their feet because they see my company as still too risky.
"I really don't want them to lend money to my company because I don't want long-term debt on my books, but I don't want to give up control of the company by giving them voting interests. I could just blow them off, of course, but truth be told I could really use at least some of the money they're throwing at me to expand my business.
"Is there any way I can make these investors happy and still keep control of my business?"
Yes -- you should consider offering them convertible debt.
A convertible note is basically an I.O.U. from a company to an investor. It operates the same way as any other debt instrument, except there's a provision in the note giving the holder (that's the investor) the right at any time to convert the note into a specified voting or nonvoting interest in your company.
By giving an investor a convertible note, you are enabling them to straddle the fence. If your company takes off and becomes wildly successful, the investor will convert the note into equity so she can grow along with you. If your company goes belly-up, the investor can hold onto the note so that, as a creditor, she will get their money out before others do.
Here are the terms you and your advisors will need to work out:
The Conversion Price: This is the ratio of the note's principal balance to the number of shares received upon conversion -- for example, "1 percent of the company's nonvoting membership interests for each $10,000 of the outstanding principal balance of the Note at the time of conversion." You should also consider whether investors will be allowed to convert their note in whole (all at once), or partially in several installments over time.
Timing: Most convertible notes give the investor the right to convert at any time, but you are free to add language saying the investor only gets the right to convert at a stated future time.
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