New York  |  Business Law

Legal Question

Asked on: 8/29/13, 8:58 am

A cofounder makes a $50K loan to the startup at the time of incorporation with the understanding that it will be able to fold into the next investment round if she chooses, thus increasing her equity by a couple/few percent. The promissory note does not mention anything about conversion into equity, just repayment. However, this investor/cofounder has emails from the other cofounders and CEO that confirm this arrangement prior to accepting the money from her; this loan is being made for the purpose of converting it in the investment round to equity if the investor/cofounder agrees to the terms of the round. The investor/cofounder is starting with a quarter of the cofounders' stake, a seat on the board, and is the company's president. The note term is 'on demand' so that she can demand full repayment anytime. Her vesting was also adjusted so that her stock vests 50% at the outset (and the rest over 2 years) because she is contributing seed funding.

My question is what legal (or possibly criminal) recourse would this investor/cofounder have if the other cofounders and CEO changed their minds and decided against allowing the note to fold into the investment round after accepting the money (so that repayment is the only option). Also, would any other concessions by the company be reasonable, such as the other cofounders taking on personal liability for this investor/cofounder's loan?


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