Notes held by company: Overview, definition, and example
What is notes held by company?
Notes held by company refers to debt instruments—typically promissory notes or convertible notes—that a company has issued and later reacquired or retained. These notes may have been purchased back from investors, acquired through a transaction, or simply never sold. When a company holds its own notes, they are generally considered extinguished or inactive, unless explicitly preserved for specific purposes under the agreement.
Why is notes held by company important?
This concept is important because it affects how debt is treated from both a legal and accounting perspective. If a company holds its own notes, it usually cannot enforce payment on itself, and the notes are typically considered canceled or void. Clarifying this in the agreement helps avoid confusion over voting rights, payment obligations, or interest accrual on notes the company already controls. It also prevents manipulation of debt-related decisions—such as amendment approvals—by excluding company-held notes from voting tallies.
Understanding notes held by company through an example
A startup issues $1 million in convertible notes to five investors. Later, it repurchases $200,000 worth of those notes from one investor. In the next round of financing, the agreement specifies that only outstanding notes held by third parties can vote on amendments. The $200,000 in repurchased notes held by the company are excluded from voting and interest calculations.
Example of how a notes held by company clause may appear in a contract
Here’s how a notes held by company clause may appear in a convertible note agreement:
"Any Notes held by the Company or any of its Affiliates shall be deemed to be canceled and shall not be deemed to be outstanding for purposes of any calculations, consents, waivers, or other actions required under this Agreement."
Conclusion
Notes held by company provisions clarify how reacquired or retained notes are treated in a financing arrangement. They help ensure fairness by removing inactive or self-held debt from decision-making and financial calculations. Including this clause protects both the company and its investors by avoiding disputes over voting rights, interest obligations, or outstanding principal amounts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.