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Convertible Note Compliance and Other Year-End Reminders

Industries: Technology

There is an often-missed compliance requirement related to year-end reporting to investors and the government regarding the use of convertible notes. 

Many companies use convertible notes for short-term financing needs most commonly as a bridge round tool with the current investors to provide additional capital until the new lead investor on the next round is found and the new round of financing is closed.  Once the interest on the convertible notes is paid in cash or, most commonly, in the form of equity in the new round, a 1099-INT should be prepared annually by January 31 along with other 1099s for an amount equal to the stated interest rate that was paid, similar to the ones that are sent related to those with a home mortgage.

There is an even more complex requirement. If a company has convertible notes outstanding at year- end where the interest has not yet been paid, and if the original loan term is greater than a year, then the company is required to send the investor a 1099 for interest as if the investor had been paid interest. This form is called 1099-OID (Original Issue Discount). Your investors will not like receiving these, but sophisticated investors will understand and expect them. These and other compliance issues will be investigated during any future due diligence and your company and management team will be in a better negotiating position when these type of compliance issues are in good order.

A few other year-end reminders are as follows:

Please let us know if you have questions or need assistance. 

River Cities Capital Funds just released their annual compensation survey.  Check out their 2018 Senior Management Compensation Survey here

Also, I hope everyone has subscribed to the new and hip Triangle tech news site GrepBeat ( ) and also my tech leader interview series, The Download, including recent articles on David Spitz, Brooks Bell, Joe Sinsheimer, Matt Tormollen, Doug Speight and Scot Wingo. New articles are planned every two weeks, so stay tuned.

HPG is pleased to sponsor Scot Wingo's release of the 2019 class of Tweeners and 2018 awards which will be unveiled January 23, 2019.  Follow the hashtag #Tweener to follow.

Finally, don't forget to register for the CED Tech Conference that was rescheduled for February 25th due to Hurricane Florence last year; it will be held back-to-back with the CED Life Science Conference.

Brooks Malone, Partner

Technology Practice Leader

Hughes Pittman & Gupton, LLP