We have attached a short document because we respect your time. Several of its shorter sentences reserve the right to make your later conversations quite long.
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.
Post Money Capital offers Ordinary Machines $500,000 on a $5 million cap, a 20% discount, 8% simple interest, and two-year maturity. Both parties are fictional. This is an educational exercise, not an offer of securities or legal, tax, or investment advice. The reading copy contains the full note; the extracts here point to the clauses doing the work.
What arrives on Monday
Start with the cash you can spend. If the full $10,000 investor-counsel reimbursement comes out of the wire, $490,000 remains before your own counsel bill and other closing expenses. The company owes interest on $500,000. The invoice has not become a smaller investment merely because it came out of the same transfer.
Cooley's public note makes each side bear its own deal expenses.1 Our imaginary investor has improved that arrangement for one of the sides. The comments below identify the change and the counteroffer.
A closing funds-flow statement should show the gross wire, every deduction, and the amount actually landing in the operating account. Budget the last figure. Ask who pays if the deal fails to close.
Debt in a company wearing equity clothes
Interest gets shares too
Interest accrues on unpaid principal only at 8% a year, without compounding.
Read the full clause and its qualifications ↗
- What it means
- The company owes a growing dollar balance until payment or conversion. Clause 1 adds the accrued interest to principal when calculating the shares issued. At the first anniversary, $500,000 becomes $540,000; the extra $40,000 has not arrived in your bank account.
- Why it helps you
- Simple interest avoids charging interest on interest. Accrual stops on the effective payment or conversion date, so the balance has an identifiable endpoint.
- Where it bites
- A delayed round increases the amount buying discounted shares. At two years the balance is $580,000. A founder who models principal alone understates the dilution before arguing about the cap.
- Ask for this
- Ask for a lower simple rate and model the trade against the cap and discount. Specify the day-count convention, when accrual stops, and whether interest converts or is paid separately. Do not substitute zero interest without tax and accounting advice.
Keep interest simple; reduce the rate to 5%; stop accrual at the effective conversion date. Show us the revised share count at twelve and twenty-four months.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley's opening note language offers simple or compounded interest. Our 8% rate, 30/360 convention, and effective-date treatment are selected example terms, not a quotation of its form. [1]
Whose assets are on the menu?
This note is unsecured, with no lien and no personal guarantee from a founder.
Read the full clause and its qualifications ↗
- What it means
- The borrower is the company. This specimen gives the noteholder no pledged collateral or founder guarantee and subordinates the note to specified bank and equipment debt. Recovery still follows applicable priorities and actual assets.
- Why it helps you
- The absence of a personal guarantee and lien is a material founder protection. Permitting appropriate senior business borrowing can also keep future equipment or bank financing practical.
- Where it bites
- A request for a guarantee, an IP lien, or a founder indemnity elsewhere can change the exposure despite this paragraph. No-guarantee language does not settle separate liabilities outside this note; have counsel review them.
- Ask for this
- Preserve no founder guarantee and no collateral grant across the whole closing package. If someone requests personal exposure, have your own lawyer identify its scope rather than accepting it as another standard signature page. Check how future senior borrowing is defined.
The obligation stays with the company; no founder guarantee or security interest is added in a side letter. Identify permitted senior debt expressly and confirm the ranking across documents.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §5.15 addresses senior indebtedness. Our equipment-debt wording and explicit no-guarantee statement are part of this original specimen, not a claim that every Cooley-generated package has identical terms. [1]
The interest clause changes what later converts. The ranking clause tells you whose property supports the promise. Read them together: a company can owe more over time without the founder personally guaranteeing that amount.
Our example has no lien or founder guarantee. Preserve that across the whole signed package. A side letter is capable of undoing the protection you admired in the main document.
The hypothetical investor wants discounted equity upside if the company does well and a creditor's conversation if the next financing does not arrive. Neither objective requires pretending it has already bought common stock.
Find the people with verbs
Highlight demand, elect, consent, amend, transfer, and receive. The cap is a price mechanism. These verbs tell you who can use the mechanism and when.
At the initial closing, Majority Holders means Post Money Capital alone: $500,000 out of $500,000. More than one name on a future investor list does not establish a balanced vote; principal amounts do. Part VI examines that ledger.
No board seat, observer seat, pro-rata right, or operating veto comes with this specimen. Ask for all side letters and companion agreements before relying on that sentence. A cover email saying partner is not an attachment index.
The documents outside the attachment
Request a complete closing list. The note's future preferred shares may obtain their rights through a charter drafted at the priced round. You have not reviewed those rights merely by reviewing this note. Part IV takes up that unfinished document.
Counsel also needs to confirm corporate approvals, authorized issuance, securities-law compliance, tax issues, and the accuracy of closing representations. The public source package supplies supporting materials; a downloaded form does not certify your facts.1
If an investor's affiliate is also a proposed landlord, supplier, or customer, review the commercial deal separately. Our fictional financing includes no such arrangement.
A founder's first reply
Please send the clean draft and redline, every side letter, the proposed holder ledger, the capitalization schedule, funding date, and funds flow. Please identify what happens if there is no next round.
Then rank the edits: operating survival, material economics, administration. A low legal-fee cap is useful. It will not compensate for a repayment promise the company cannot meet.
The founder has the right attachment now. It is time to open the denominator.
You are financing the invoice too
Read the full clause and its qualifications ↗
Each side pays its own counsel. If reimbursement is required, cap actual closing fees at $5,000 for the whole series, payable only when funded; no repeated cap for later closings.
Commercial request, not execution-ready legal language. It is not an agreed change to the specimen.Source boundary. Cooley §5.11 makes each side bear its own negotiation and closing expenses. Our $10,000 investor reimbursement is a deliberate departure, not a fee demanded by Cooley's public note. [1]