Hi,
Mezzanine debt on the following terms: - bullet, principal accruing. - payment date: 100% on exit, when the company is sold. - payment method: in shares, with share price equal to the valuation at the sale of the company.
Thanks!
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You should probably consult with securities/tax lawyers. That said, since this is an internet forum I am obliged to offer my 2c:
1) I'd start with maturity being on the earlier of something like a) 50 years or b) a "Liquidity Event". You probably need to have a finite maturity date defined to retain tax benefits of debt.
2) What do you mean by "share price equal to the valuation at the sale of the company"? Are you saying that this debt is convertible into 100% of the shares upon exit...?
1) Sounds right.
2) Example: - company took mezzanine debt from "individual A" of $10 million. - company is sold to "individual B" in 2020 for $100 million. It has 1,000,000 shares, therefore it was sold at $100 per share. - this triggers a liquidity event: the entire principal of the mezzanine debt is owed, currently at $15 million - "individual A" receives 150,000 shares as payment for the mezzanine debt.
Got it, you are talking about conversion price/ratio then. I'm sure a lawyer can figure out a way to define that.
Better question is why are you contemplating this kind of structure? What is the "problem" you are trying to solve with it?
Note: Legal advice will be consulted if this is carried through! I just want to know before hand if it's an obvious no, obvious yes, if there are other debt instruments that essentially do the same, other options, etc.
Basically, shareholders can't agree on valuation for capitalization, so I'm exploring debt instruments that can safely convert to shares on a valuation that makes sense for all parties. Cash is tight so bullet would be mandatory
It's scary to me -- if you are the owners of the company -- that you can't agree on valuation but have no problem issuing securities. You can't quantify the cost.
I would put it as a rights offering, if your co-owners don't like the valuation then they don't have to participate. If they do then they won't be diluted.
Good idea, but won't work because some shareholders don't have the capital and won't approve the rights offering.
...but they'll approve essentially undetermined dilution?
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