Securing Notes Against Patents Investors may ask that the notes be secured by all or some of the assets of the company. For biopharmaceutical companies,
those assets would likely include key patents. A security interest gives note investors priority rights in a dissolution of
the company. Protective Covenants Investors may also ask for certain protective covenants, i.e., the right to approve certain actions by the company. These
covenants might prevent the company from, for example, closing future financings, selling the company, incurring other debt
or adopting a new employee equity incentive plan without approval of the note investors. Other Demands Investors may ask for representation on the board, either in a formal capacity or as an observer. Creative investors may
also demand additional rights if the company does not meet key milestones, including higher warrant coverage or discounted
conversion rights. Investors may also ask for personal guaranties from company principals. These and other terms and conditions
may not be typical but companies should be aware that they are becoming more prevalent as the capital markets tighten. CONCLUSION Convertible note financings are an attractive and increasingly popular form of investment for companies and investors alike.
But given the high stakes of these investments, the complexity of the terms, and the emergence of additional terms and conditions
which may be much more onerous to issuers and their principals, companies should carefully consider the tradeoffs versus
traditional equity rounds and be sure to understand fully the risks associated with such an offering. Peter N. Townshend is a partner and George Colindres is an associate at McDermott, Will & Emery, San Diego, California, 858.643.1410, ptownshend@mwe.com
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