We have raised $120k from one angel investor using a convertible note, and spent two years going through several iterations building our solution. From various reasons we are about to sell our company (mostly the technology) to a buyer for $300k.
I’m trying to figure out how to split the $300k between the investor and the founders.
Should we first return the full investment to the investor and then split the remaining $180k between the rest of the stakeholders (mostly founders) based on the equity split?
Or should we negotiate with the investor and return less than the investment, so other stakeholders get a bit more in return for their investment of mostly time and some money?
Any thoughts, personal experience or ideas will be highly appreciated.
The answer to this should be entirely in the terms of that convertible note, which I assume has not converted yet. Most such notes have a section covering what happens if the company is acquired. Typically the note either converts to equity at some pre-determined valuation or it requires the note to be repaid plus some amount of interest. Sometimes either you or the investor have the right to choose what happens.
If the note clearly defines what should happen, then you should do that thing. If it is not defined then I suspect you would need to pay off the note.
If you have a good relationship with the investor it never hurts to try to negotiate, but you are unlikely to have much leverage.
I infer you have no documentation from the investor regarding such an event. In that case, because investors are extremely valuable to have support you in the future, I would make the investor whole, then distribute the proceeds to the team. It is very strong to report to other investors that you had the best interests of investors in previous ventures first and foremost. For you and your team, without the investor, you would not be splitting $180k.
Unfortunately, you don't just get to choose how to split the cash - the terms of the note determine that (as others have pointed out). A couple things to consider:
+ Has the note converted yet and/or will this purchase qualify for conversion? They usually convert after set periods of time (sometimes 36 months), during qualified financing (usually $1M+ dollars), or during an acquisition.
+ If not, you'll likely end up paying between 7-8% per annum in interest, which should be stipulated in your note.
+ Are the investor / buyer interested in keeping the investor on for strategic, fundraising, or other reasons? If so, you may be able to negotiate a better deal for him / yourselves in exchange for keeping the investor connected with the new company (if he/she has a desire to see it reach the market, or to achieve higher returns).
Hope it helps!
What you should do in this situation- should be described in the actual note. For example, what are the terms of conversion and what are the triggers?
From an ethical perspective, I would think the note holder should have the option on converting or getting repaid his principal with accrued interest.
This is a fundamental ethics question. Pay the investor their return, pay all of the company bills then you and the founders get what is left.
If you never want to borrow money again or look for investors to trust you again, you could always attempt to negotiate with the Angel. This is basically going back on your word to which you signed an agreement (promise) when you needed his money. Bad karma my friend!
One of the reasons early investors choose convertible notes is exactly for these low-acquisition events.
So, just pay him back whatever is in that note, which is probably $120k + 20% or so? And then the owners can split what is left.
An investor knowing you did the right thing is a quite likely investor for your next venture.
Pay back the investor with interest! You will need him or her again someday!
If we approach it from a transactional perspective is very simple. You took a loan from an entity (this case an investor not a bank). First you pay out the loan then what remains after all other expenses are deducted you split between shareholders or stakeholder according to agreements in place.