Debt to Equity question

[peaceinvt]

What is the name of your state (only U.S. law)? Vermont

Hello -
We have had an S corp for 16 years. We have 2 primary shareholders with the remaining 3 having under 3%. The primary founder and his investment partner have the bulk of the equity.

We are doing a debt conversion. The founding partner will convert $54k shareholder debt into equity and the investment partner will convert $205k from shareholder debt to equity.

However, my question relates to the method they are choosing. The founding partner wants to dilute himself as little as possible, so both major partners have agreed that he will FIRST convert his debt at $30 per share. Then, the investment partner will convert his debt at $50 per share with only 1-2 weeks inbetween.

Is there something wrong with this scenario? Can they legally do this? Should there be a longer time frame for the share price difference? If so, can I pre-date the first partner's conversion back to, say, Sept and then do the second partner's conversion in Dec?

Thanks so much.

 

[LdiJ]

What is the name of your state (only U.S. law)? Vermont

Hello -
We have had an S corp for 16 years. We have 2 primary shareholders with the remaining 3 having under 3%. The primary founder and his investment partner have the bulk of the equity.

We are doing a debt conversion. The founding partner will convert $54k shareholder debt into equity and the investment partner will convert $205k from shareholder debt to equity.

However, my question relates to the method they are choosing. The founding partner wants to dilute himself as little as possible, so both major partners have agreed that he will FIRST convert his debt at $30 per share. Then, the investment partner will convert his debt at $50 per share with only 1-2 weeks inbetween.

Is there something wrong with this scenario? Can they legally do this? Should there be a longer time frame for the share price difference? If so, can I pre-date the first partner's conversion back to, say, Sept and then do the second partner's conversion in Dec?

Thanks so much.

So, you are saying that the two major investors are taking new shares issued by the S-corp, in exchange for the debt the S-corp owes them, but they don't want to massively change their percentage of ownership by this "purchase"?

Well, the first conversion of debt to equity will automatically increase the value of the S-corp as the S-corp will have 54k less debt and 54k more equity. Therefore I cannot see it being a problem for the second conversion to be at a higher rate.