Philadelphia Business Lawyer Sarah E. Holmes
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Promissory Notes, Convertible Notes and Debt Financing

​Promissory Notes, SAFE Notes, Convertible Notes and Debt Financing

There are a number of ways to use debt to finance a business or start-up.  Common debt instruments include things like convertible notes and promissory notes.  Below is a brief explanation of the differences.

Promissory Note:  a promissory note for a business or start-up is very much like a loan in the traditional sense. It has an interest rate, a term (length) for repayment and consequences for default.  If Uncle Joe wants to loan you $10,000 for your business, your business or start-up would sign a promissory note to repay Uncle Joe.  There are tax consequences for both the investor and the business owner on promissory notes and their interest, so it's wise to also check with an accountant on the structure.  Sometimes one of the start-up's founders will loan the business money.  Even though the loan is from a founder, a promissory note with formal terms should be executed.  Again, there are tax consequences to this, so make sure to have the note reviewed.

Convertible Notes:  convertible notes are promissory notes that could also convert to equity in the business upon a certain event occurring.  A convertible note will also be for a specified term and at a specific interest rate.  If the note is not repaid within that time frame, it converts to equity.  Many founders like convertible notes because it's like they don't mentally have to deal with repayment for some time. They can kick the can down the road, so to speak. However, this can be a dangerous attitude as those notes come due much sooner than you might realize and before there might be positive cash flow.  Also exercise caution in who you issue convertible notes to. If there's a conversion to equity, that person is now a new business partner and you should be sure it's someone you want to have in your business.

​If you need help drafting a promissory note or convertible note for your business, please contact our office for help.
Holmes Business Law, P.C.
​Two Convenient Locations- Main Line and Center City
40 E. Montgomery Avenue (all mail)
4th Floor
Ardmore, PA 19003
and
1515 Market Street
Suite 1200
Philadelphia, PA 19102
215-482-0285
 

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  • Home
  • Attorneys & Areas of Law
    • Business Entities >
      • Corporations
      • Limited Liability Company (LLC)
    • Business Immigration
    • Business Purchase or Sale
    • Raising Capital & Investor Agreements >
      • Promissory Notes and Debt Financing
      • Private Placement and Equity Financing
    • Business Contracts >
      • Consulting Agreement
      • Employment Contracts
      • Independent Contractor (1099) Agreements
      • Website Terms and Privacy Policies
    • Copyright & Trademark
    • Hiring Employees/NDA/Non Compete
    • Estate Planning & Wills
    • Commercial Real Estate >
      • Commercial Lease
    • The Right Start Program
  • About
    • Speaking and Events
    • Client Testimonials
    • Privacy Policy/Terms of Use
    • Contact
  • Business Success Tips
  • Flat Fee Packages
    • New Businesses
    • Existing Businesses
    • Dispute Resolution
    • Trademarks & Copyright
    • Estate Planning
  • COVID-19 HELP