Why there’s no need to fear convertible notes or Why Virtual Nerd Declined a $70,000 Competition Prize

It’s hard to imagine a scrappy start-up entering a prestigious business plan competition, working hard to advance, winning the competition — and then walking away from a $70,000 investment prize. But that’s exactly what Virtual Nerd did after winning the 2008-9 Olin Cup competition at Washington University in St. Louis.

An online, video-based math and sciences tutoring company, Virtual Nerd viewed the competition as a kind of “entrepreneurial boot camp,” said the co-founders, Josh Salcman, an interactive designer, and Leo Shmuylovich, an M.D.-Ph.D student in physics and cardiology at Washington University. They said they did not care how much the prize was worth.

On Feb. 5, 2009, when they won, they were ecstatic, but they felt they were unprepared to negotiate the terms of a convertible note, the form of the investment prize offered at the Olin Cup and many other competitions.

What exactly is a convertible note? “It’s a loan that can be converted to equity under certain circumstances, which are largely determined by the lender,” said Gregory Price, a certified public accountant and the director of consulting services at PKF Texas in Houston.

By LORA KOLODNY

Full Story: http://boss.blogs.nytimes.com/2010/03/23/why-virtual-nerd-declined-a-70000-competition-prize/