Promissory Notes

March 5, 2020

I talked about practical oversight, and that’s
very, very important. The legalities are also important. You want to make sure that you
are securing your investment to the greatest degree possible. How you can secure that investment will depend,
to some extent, on what is the nature of your investment. Is it an investment, or is it
actually a loan? In either, case there are things that you can do to protect that investment
and/or loan. I’m just going to quickly go through some of the most important devices
that are used to secure the source of investments. One thing that often makes sense to have,
I won’t say always, but often, is a promissory note. A promissory note is a promise to pay,
and you want to make sure that you have a promissory note and that it has been reviewed
by your counsel. You don’t want to draft your own agreements.
I have seen some of the ugliest agreements that you just can’t even imagine. I recall
going into one contract review in the context of a partnership dispute where there was a
nasty falling out. Guys were once friends and they’re no longer friends. They were once
looking at making gazillions of dollars together in this enterprise, and everything had gone
terribly. They were not dumb guys, but they also weren’t
lawyers. Drafting contracts is not what they did. Except it is what they did; they drafted
their own contract. The one guy who was my client came to me and said, “Okay, here’s
our agreement. What do I do? How do I solve this problem that I’ve got?” He said, “I drafted
this thing, and I think it’s got all the important terms in here.” He handed it to me and it was a page and a
half long, and this was a significant investment. I thought, “Oh, it can’t have all the important
terms in here because there’s just not enough room for the important terms in this page
and a half.” As I looked at the agreement, the heading
on the agreement is something that I don’t think I’ll ever forget. It said in big, bold
letters at the top “Contractural Agreement,” misspelling the word contractual, had an “r”
in there. Anyways, that’s an indication that your contract may have problems. You want
to put the protections in place, get a promissory note.

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