Combining Equity and Debt Financing
Recently, there have been some offerings that combine both debt and equity in order to give the investors some liquidity in a debt instrument and a possible upside for growth with an equity component. One method is to use unsecured promissory notes that give the lender the option to convert all or a portion of their investment into an equity interest in the company, usually at a discount below any current offering price of the company's stock. Using any method that involves the sale of securities by the company means federal and state securities laws must be observed. Chapter 5 discusses some of the issues surrounding securities offerings.
Several years ago, it was common to see real estate development loans containing a provision that allowed the lender to participate in the equity or income potential (or both) of the underlying real estate project. Your company can offer a debt instrument coupled with equity or income participation as an inducement to invest. The LLC format is particularly suited to this type of investment because of the flexibility of the partnership taxation rules. Again, these are fairly complex offerings that require carefully drafted documents as well as compliance with the securities laws. As you enter the arena of hybrid debt instruments, a do-it-yourself approach is not advisable.