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Anti-Layering Provisions In Convertible Notes

Definition for the day: Anti-Layering Provision. A common scenario in start-up finance involves use of the convertible note. Simply put, an angel puts in money in the venture in the form of debt through a promissory note. That note however, will not be a run of the mill "IOU." Rather, it will have a variety of special provisions that make the debt more "secure" for the angel. The most obvious of this is the option to convert the debt into equity at some discount, hence the term ?convertible.?

Another less obvious provision is the so called "anti-layering" clause. This clause will prevent the start-up from issuing debt "in-between" the convertible note and some designated class of senior debt. So for example, where a start-up has already issued some notes and/or secured some bank debt (the "Senior Debt"), it may offer not to add any more layers of debt that is senior to the convertible note and junior to the Senior Debt. Hence, the anti-layering provision is another way of making the angel more secure.

In the end, one will find that all the start-up jargon out there is not as impenetrable as it seems. Usually, they mean exactly what they say.

Full post as published by BizMediaLaw Blog from Wahab, Riveles & Medenica LLC on November 23, 2007 (boomark / email).