Promissory notes are a highly attractive financing tool often used early in a startup’s life while the company is achieving product market fit. Their structure delivers speed and flexibility while avoiding cost and complexity.
An increasingly commonly used tool for promissory notes is to create a ‘program’ where multiple financing parties all participate through individual notes, each with the same or similar terms. Often, promissory note providers want to provide only a fraction of the capital a company is looking to raise. Combined with the fact that often family and friends or family offices are most likely willing to offer promissory notes to an early stage company, a program is a great way to capitalize on both aspects.
Creating a program with short duration promissory notes gives a Company the flexibility to incrementally increase or decrease credit capital. This flexibility is incredibly valuable for an early stage startup.
Concurrently with (or following) a seed equity round is often the best time to create a PNP. Seed stage investors have already spent time getting to know the vision and team and are already excited about the company. The highest probability of success should come by asking these investors to contribute their capital in equity and in credit while you have their attention. If the credit economics are attractive enough (sometimes warrants are a helpful tool to encourage credit capital from investors more familiar with equity), family offices and individuals should be interested.
