When a small firm or start-up business needs financing, it commonly looks to “Angel Investors.” Angel investors are often rich people who make early-stage investments in businesses. Such persons may invest by acquiring shares directly from the corporation, either directly or via a controlled entity (such as a trust or LLC). Angel investors may also participate in the firm by giving a loan, which can be secured or unsecured by the company’s assets. These loans may include a “conversion” right to convert part or all of the loan amount into company stock, and the paperwork for such loans is usually in the form of a Convertible Promissory Note.
Whether the loan converts to stock or not, a Promissory Note is generally the principal legal instrument used to commemorate the company’s commitment to repay the angel investors’ loan.