Some investors are willing to purchase convertible notes without representations and warranties from the company. These are statements about the status of the business or its operations.
How much detail will be included in notes often is a source of significant debate. Some practitioners believe that investors should get the same representations and warranties that a Series A Preferred Stock investor would receive. Others believe the representations and warranties should be less extensive for simplicity.
This is partly because early stage companies don’t have much to disclose, though that makes it easy for the company to give. Also, in a practical sense, investors are limited in terms of recourse. Breached representations and warranties give rise to damages claims, but that can be a pointless endeavor against an early stage company with no money.
However, when I represent investors in any financing, convertible note or otherwise, I generally request full representations and warranties as an assist in the due diligence investigation. It is reasonable for the investors to be able to look at the purchase agreement, with the related disclosure schedules, and get a full picture of the company. This is very helpful in connection with the investors’ due diligence investigation. If the company makes a material misstatement or omission, the representations and warranties will have been breached and the investors can foreclose on the notes pursuant to the default provisions, rather than waiting until the notes mature to attempt to recover their investment.
