The acquisition announcement will say everybody is thrilled. The closing statement will specify the exceptions.
The shaded passages are from our fictional note, not verbatim Cooley clauses. Comments explain the trade, suggest a counterproposal, and translate our imaginary investor’s incentives. Structural references: Cooley’s CC0 Series Seed form; the tougher selected economics and fictional commentary are ours. An ask is not an agreed change or a guarantee you will get it.
Before conversion, clause 7 lets our fictional holder choose doubled original principal plus interest or common conversion at the defined cap price. These are alternatives, not cumulative payments. Cooley's source form offers optional sale-premium and conversion mechanics; this premium and selected combination are ours.1
After a priced conversion, stock follows its own rights. Part IV's preferred-stock issue is not this unconverted-note sale election.
The arithmetic
| Available proceeds | Cash claim | As converted | Investor paid | Residual equity |
|---|---|---|---|---|
| $700,000 | $1,040,000 | $68,231 | $700,000 | $0 |
| $10,000,000 | $1,040,000 | $974,729 | $1,040,000 | $8,960,000 |
| $20,000,000 | $1,040,000 | $1,949,458 | $1,949,458 | $18,050,542 |
Swipe or scroll the table for all columns →
Illustrative arithmetic, not a forecast or transaction-specific advice. Definitions and exclusions appear in the specimen and accompanying text.
Assume a clean cash sale on the first anniversary: five million defined capitalization shares, a $5 million cap, and $540,000 converting. There are no other notes, preferred stock, senior claims, fees, taxes, escrows, earnouts, or buyer stock in this model.
Doubled principal plus interest is $1.04 million, not $1.08 million. The premium doubles $500,000, not the whole balance.
Common conversion issues 540,000 shares and gives the holder about 9.75% of 5.54 million shares. No new-money round occurred, so importing Part II's 8.26% would add shares that this sale never issued.
Three prices for the same congratulations
At $10 million of available proceeds, common conversion would receive about $974,729. The $1.04 million cash election wins and leaves $8.96 million to existing equity under the clean assumptions. The holder does not take its conversion percentage from that remainder too.
At $20 million, common conversion receives about $1,949,458 and wins instead.
At $700,000, the note's cash claim exceeds the whole pot. This sole noteholder receives at most $700,000 in our simplified model; existing equity receives nothing. The unpaid claim is not another check waiting offscreen.
That last row is not a bankruptcy waterfall. Actual legal priorities and other claims can change the result.
Premiums should have names
A premium can compensate early risk and interrupted upside. It can also make a modest acquisition much more attractive to the investor than to the people holding common.
Ask for the exact premium, exact base, exact trigger, and actual alternatives. A new financing, equipment sale, or internal reorganization should not casually become a control-sale premium. Coordinate the definition with the charter and other instruments.
The buyer is not purchasing your clean example
What if half the price is an earnout? Does the noteholder get cash at closing while common waits for performance? What if the buyer pays stock? Who bears escrow and indemnity exposure?
Our specimen does not fully resolve those questions. A real transaction needs documented elections, valuation, timing, withholding, and allocation. Putting a cash claim in the note does not turn contingent consideration into cash.
Bring those cases to counsel before promising distributions. Work it out at exit is an efficient way to give somebody else's acquisition deadline control of your negotiation.
Creditor status is not a parachute
Clause 8 leaves this note unsecured and behind specified bank and equipment borrowing. A larger senior balance can reduce recovery without changing the cap.
Ordinary winding-up uses principal plus interest, not the sale premium. Default accelerates that balance; it does not add the premium either. The note does not personally guarantee recovery through the founder.
Draw the waterfall while the buyer is imaginary. It is easier to adjust the terms before anyone is waiting to issue a press release.
The acquisition has an early-withdrawal fee
Read the full clause and its qualifications ↗
Offer principal plus accrued interest or the common-conversion outcome, with no additional premium and no double recovery. Document how each election shares contingent and noncash consideration.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §2.4 offers a repayment premium and an optional common-conversion alternative. Our 100% principal premium and selected election mechanics are deliberately investor-friendly example choices. [1]