Reverse Vesting Triggers Governing Pre Existing Intellectual Property Conversion Rights
Reverse vesting triggers convert pre-existing intellectual property assignments into licenses or debt upon corporate equity repurchase.
subordinated promissory note
Meaning
Written promises to pay a specific sum include a ranking that determines the order of recovery for the lender. A subordinated promissory note is frequently used when a founder sells their shares back to the company but agrees to wait for payment. It allows the business to maintain its senior credit lines with traditional banks.
Payment Priority
Holders of this instrument only receive funds after all primary creditors and bondholders have been satisfied. The subordinated promissory note sits in a precarious middle ground between pure equity and secured debt. If the company faces insolvency, the likelihood of full repayment for this note is significantly reduced.
This structure is a necessary compromise to allow the company to function while owing money to its former owner.
Funding Utility
Growth is facilitated by keeping the balance sheet attractive to external investors. Because a subordinated promissory note is seen as hybrid capital, it does not hamper the ability to take on new senior debt. The founder provides the company with flexible capital that would be unavailable elsewhere.
It is a mechanism for transition that balances the needs of the firm with the exit requirements of the individual.
Capital Risk
High interest rates are often attached to compensate for the lower security of the loan. The founder trades the safety of their capital for a better return on the subordinated promissory note. Monitoring the financial health of the business becomes a constant concern for the note holder.
Every new senior loan the company takes on increases the risk that the founder will not be repaid.