Opinion ID: 618229
Heading Depth: 3
Heading Rank: 1

Heading: The Initial Investment

Text: In April 2001, Kenneth P. Weiss met Robert Horton. Weiss expressed interest in investing in Horton’s alternative fuels 20618 STRATEGIC DIVERSITY v. ALCHEMIX CORP. start-up company, Alchemix Corporation. At the direction of his accountant, Weiss set up Strategic Diversity, Inc., (“Strategic”) to handle his investments. In Strategic’s first venture, Weiss sought to invest $500,000 in Alchemix and requested certain collateral to secure his investment. Approximately two weeks later, the parties arrived at an agreement. In a seven-page agreement signed on July 2, 2001, Strategic agreed to invest $500,000 in Alchemix. The agreement incorporated the following: (1) a convertible promissory note (“Note”) in the amount of $500,000.00; (2) security interests in Alchemix’s patents and intellectual property rights; and (3) a warrant which included a provision that ensured capitalization of the company could not exceed 40 million shares (“Warrant”). The Note was to be paid after five years at an interest rate of ten percent per year compounded monthly. Under the terms of the Note, Weiss had the option of converting the Note to 250,000 shares of stock at a price of $2 or such price as offered to other investors. Alchemix had the ability to prepay the Note after one year if three conditions were met: (1) Alchemix had to give Strategic 30 days advance written notice; (2) Alchemix had to pay a prepayment penalty of $10,000; and (3) during the 30 day notice period, Alchemix had to give Strategic the option to convert the Note into 250,000 shares of Alchemix stock at $2 per share or any lower price offered to other investors. While the agreement did not guarantee Weiss a seat on the Board, it stated that Alchemix “shall immediately undertake its best efforts . . . to elect Weiss . . . and retain [him] in such Board position at least until such time as the [Note] . . . [has] been satisfied or converted pursuant to the terms delineated therein.” Weiss obtained his seat on the Board shortly after his investment was made. STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20619 As part of the loan, Weiss also obtained secured interests in Alchemix’s property in certain patents and protection in the form of anti-dilution provisions.