How Can You Unwind a Redemption Clause? Six Options

Situation: A company exchanged a small percent of their stock for a Series A unsecured note 4.5 years ago. The company has not undergone an IPO because of the recession and if the note is not repaid in 5 years, the holder has the right to call the line. If the company can’t repay the line, the holder gains governance rights. Revenue declined during the recession and while it is on the upswing, the company doesn’t have the cash to repay the note. What are the best alternatives for the company to unwind this redemption clause?

Advice from the CEOs:

  • Raising money to repay the debt will be problematic because of the current liability. Investors want their investment to fund growth and returns, not to simply repay debt.
  • Assuming that your revenue rebound is sustainable can you prioritize resources to accumulate cash to repay the note? Jack Stack, in The Great Game of Business describes how he was able to rally his company’s employees to pay off a seemingly impossible debt load in one year to save his company,
  • If raising the cash to pay the note is impossible, you have 5 options:
    • Convert the note to long-term debt that you can service.
    • Convert the note to equity at a lower evaluation and take some dilution.
    • Renew and push out the note, with a sweetener.
    • A combination of the above.
    • File Chapter 11 if you can’t produce or raise the funds.
  • Have your options in place at least 2-3 months before the note is due. This gives you time to talk to and bargain with the note holder.
  • Start a PR campaign with the note holder.
    • Look for leading and lagging indicators that show your progress.
    • Build a story that lends credibility to your forecasts of future success.
    • Pitch that you are a good long-term investment, and now is the prime time to trade the note for equity.
    • Prep the holder, and build this story gradually over time.

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