ElliottBenton4

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The Note Cap Table The convertible note cap table was a creation of Merger Capital, which along with Bradstreet Consulting, LLC, are responsible for creating the first convertible note holders agreement. This particular document was created back in the early nineties, but the origins can be traced all the way back to the eighth century. It is interesting to note that the cap table has not only remained strong throughout the years, but it has also increased in value. This is because the parties to the contract who have convertible notes tend to be able to cash out on their shares at a much higher price than what they could have done several years ago. It is for these reasons that it is vitally important to understand what the cap table is and what the various uses are.    The convertible note cap table was designed to prevent "issuers" from taking advantage of "brachios" or new note investors by locking them into long-term contracts with extremely high purchase prices. The purpose was to limit the ability of these people to become large cap stock investors because there were so many individuals who invested in convertible notes but did not have the means to actually do so. The document is used as a means of giving all of these individuals a way to convert their notes into shares of the parent company. While this might seem like an unnecessary step, it is necessary because if the process was allowed to continue then it would cause dilution of the existing ownership.    For years the convertible note cap table has been abused by convertible note investors and their lawyers. In fact, the abuses became so rampant that the SEC (Securities and Exchange Commission) was forced to create regulations to prevent such behavior. If the law was not already in place then such companies and their creators would have been shut down. The problem with these regulations is that while they do affect those who are writing the agreements, they do not actually affect those who actually carry out the transactions. So in essence, you can be an unethical, capricious, and dishonest businessperson and still obtain a note from the founder. That is the genius of the founders network.    The owners use the document to either get out from under the financial obligations of the company or to simply buy more time to raise the capital needed to meet their obligations. startups could for example choose to convert the accumulated accrued interest into cash. The only rule is that the company cannot increase the total amount of money owed at any time during the life of the note without also increasing the accrued interest. The same can only be true if the company does not sell the convertible notes before the maturity date on each of the notes.    There are a couple of ways that the company could possibly get around this stipulation. First, they could choose not to sell the convertible notes at all. This would force the investors to wait until the next round of capital raising which would take another eighteen months or more. The company could also opt to increase the total amount owed by adding new note holders during the current round of financing.    However, the real strategy here is to convert as much of the convertible notes as possible into equity so that there will be no need to raise additional capital during the current round of financing. This could be accomplished by issuing notes for 100% of the face value. Then the company could issue new convertible notes with a discount to the holders of the original note. These new notes will have an embedded discount that will give them a lower cost than issuing new securities.    Of startups , this is only one potential method of reducing the cost of financing. startups is to simply pay down the outstanding balance as quickly as possible. This is where the company could make a profit by selling some of its assets such as office buildings or manufacturing facilities. This could even include selling some of its patents. Of course, it will depend upon the cap table given in the note when it comes to determining the maximum amount of the discount that can be applied.    There is also a third method that can be used to reduce the cost of financing conversions of convertible notes. This method is known as the cash surrender cost or the surrender price. This is a stipulation that is made in the indenture which must be met by the company if it wishes to make a successful conversion. In essence, this stipulation states that the company must sell a specific number of shares of its common stock for each convertible note. If the company does not agree to this sum, then the note holder may have to wait until the buyer agrees.

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