Expert: Brett Cenkus - 6/26/2001

Question
Would it possible for someone to sell a small number of bonds and use that money as seed money to start a company. I know that a corporate charter would have to be filed and that the investors would have to be shown that there is a plan to pay them back. But could a person sell the bonds as a way to raise the initial seed money and maybe a little working capital. Any ideas on this. Is it possible? If so, anyone know how it might be done?  

Answer
Joshua, it is definitely possible and is done often, though most frequently the bond is a convertible bond.  

A convertible bond is essentially a hybrid between equity and debt -- it has the characteristics of a bond (interest payments, etc.), but it can be converted into equity in the company upon the happening of certain events (e.g., IPO).

I suppose you would be able to find an investor willing to give money in return for plain bonds (just debt repayment), though the interest rate would have to be very high to justify the risk and, at those rates, you (as an entrepreneur) are likely better suited to take an investment as equity.

Hope that helps.