AUSTIN –Texas State Representative Jason Villalba (District 114) announced today that he authored and filed House Bill 2051 to enable Texas universities to accept convertible notes in order to expedite licensing and commercialization of their intellectual property.
“Texas colleges and universities have unlimited potential for creating new ideas and products that benefit consumers,” said Representative Villalba. “This bill will enable our institutions of higher learning to translate successes in the classroom into real-world companies - and new companies create Texas jobs and grow our economy. ”
Texas statute currently provides that universities that contribute intellectual property or make cash investments in newly created companies do so only in the form of an equity investment; however, this process can stifle early-stage investment because many early-stage investments are effected in the form of loans. Convertible notes are a useful investment tool in the entrepreneurial industry because their use delays the difficult task of assigning a valuation to the newly-created company.
Convertible notes are a type of security that the holder can convert into shares of equity stock of the issuing company or cash of equal value at an agreed upon price. Companies are very difficult to value in the early stages of development because it is difficult to forecast the potential financial success of a new idea, service, or product.
For the purpose of making an investment, convertible notes are structured as loans. The outstanding balance of the loan can, under certain circumstances, be converted into equity when a subsequent investor invests, under terms that are governed by the terms set by the later-stage equity investor. This allows the valuation of the company to be delayed until the owners of the new company are able to secure investors and more fully develop the enterprise.