Founder Personal Guarantees: Should You Sign One?

This is part of our Open Contract series where we open source our debt and non dilutive capital legal paperwork so founders can learn faster.

Term:

Personal Guaranty

Common Questions:

• Is it ok to sign a Personal Guaranty as a founder?
• What is a personal guarantee?

Simple Explanation:

Financing groups ask founders to confirm they do not plan to participate in any “bad boy” acts including Fraud, Theft, Willful Misconduct, Gross Negligence, Intentional misrepresentation, Not paying taxes, or filing a voluntary bankruptcy petition.

Negotiation Tip:

Since this PG is only focused on Bad Boy acts, it is called a “limited guarantee” and gives the Financing Group less protection than a full personal Guarantee from the Founder. For example, if the company does not pay Financing Group back, this PG does not give Financing Group the ability to require the founder to personally pay any non-paid funds.

Contract Language:

[Founder] shall provide a limited guaranty of Borrower’s obligations under the Facility in connection with certain “bad-boy” acts, which are to be confined to fraud, theft, willful misconduct, gross negligence or intentional misrepresentation, misappropriation of funds, nonpayment taxes or filing a voluntary bankruptcy petition.

Type of Funding:

• Term Loan Term Sheets
• Term Loan Credit and Security Agreements (CSA’s)