The buyer wants us to finance forty percent of the transaction with a seller note but refuses to provide any personal guarantees or collateral. How do we negotiate an equity conversion feature to protect our capital?

Question

Tyler Smith · Accepted Answer

A large, unsecured seller note carries significant risk, especially without personal guarantees. If the buyer runs the company into the ground, you have very little recourse to recover your funds. To balance this risk, you should negotiate an equity conversion right, often called a warrant or a convertible debt feature.

This feature gives you the option to convert a portion of the outstanding note balance into equity of the parent company if certain events occur. For example, if the buyer misses two consecutive interest payments, the note should automatically convert into preferred shares with senior voting rights.

This gives you a clear path to step back into the business and protect your assets. Use your Accountability Chart as a tool during this negotiation. Show the buyer that if a default occurs, your leadership team is fully capable of reassuming operational control because they already run the day-to-day operations.

Additionally, structure the conversion terms to include a premium. If you are forced to convert your debt to equity due to a default, the conversion price should be set at a discount to the original valuation. This compensates you for the added risk and provides a strong incentive for the buyer to prioritize your payments.