The PE Deal Series · Post D.6
View the full series →Seller Notes That Aren't Really Yours
Just because your name is on the economics doesn't mean you control the money.
Most founders assume a seller note works like any other loan. You hold the note. The buyer owes you money. If they don't pay, you collect.
That assumption falls apart the moment your attorney explains who actually holds the note — and who doesn't.
In the Crossfield deal, $15M in seller notes looked like deferred cash the founders would eventually receive. The notes were real. The debt was real. But the enforcement rights belonged to an entity, not to the people who earned the money.
The Middleman
Imagine you sell your house via owner financing. The buyer pays part of the price upfront and signs a promissory note for the rest. Straightforward. You hold the note. If the buyer stops paying, you hire a lawyer and go after them.
Now imagine the buyer insists the note be held by a company you don't control. You can see the note. You can see the payments. But only the company can demand payment, file a claim, or take legal action. You're a beneficiary on paper. In practice, you're a spectator.
That's what an intermediate entity structure does to seller notes. It puts a wall between the money and the person who earned it.
The Standing Gap
Crossfield Holdings — the entity — held the $15M in seller notes. Not James. Not Dan. The entity.
Post-close, Ridgeline controlled CFH. The entity could enforce the notes. But the entity was now run by the party that owed the money. Neither founder had personal standing to demand payment. James had proximity — still in the building, still CEO — but to enforce, he'd have to ask his employer to sue itself. Dan had nothing.
This is the standing gap. The right to receive money and the right to demand money are two different things. Both founders had the first. Neither had the second.
Barrett Law Group flagged this during negotiation and recommended each founder hold their pro-rata share directly. Whitfield rejected the change. Ridgeline wanted one counterparty, one enforcement mechanism, one point of contact. Clean and efficient — for the buyer.
James and Dan didn't push back. The same fracture that drove the sale prevented them from negotiating as a unit on the terms that mattered most.
The $15M exists. The obligation exists. But the only entity that can enforce is controlled by the party that owes the money. The entity structure didn't just consolidate the notes. It consolidated the leverage.
Ridgeline needed James to stay quiet and Dan to stay powerless. The intermediate entity made sure of both.
Deal Spectrum: 10/10
The left column shows what a founder-favorable version of this term looks like. The right column shows what Crossfield signed.
The mental model is the Standing Gap. Holding a note and having the right to enforce it are two different positions. When an intermediate entity sits between the seller and the buyer, the entity has standing. The seller has a claim — but no mechanism to act on it.
The Crossfield Moment
Eighteen months after closing, Dan called Barrett Law Group. He'd retained them separately through a personal engagement. The question was simple: how do I make Ridgeline pay the principal on the seller notes?
Barrett's answer was simpler. "You can't. The entity can. And Ridgeline runs the entity."
Dan had spent 24 years building the business. He had $15M in notes with his name nowhere on the enforcement line. His only path to that money ran through a company his buyer controlled.
Founder Protection Tips
Demand direct notes — each founder (or their trust) should hold their pro-rata share via separate instruments. "Administrative convenience" is not a reason to give up control over your own money.
Require personal standing and independent enforcement rights for every seller. If you can't sue to collect, you don't hold a note — you hold a hope.
Negotiate strong security — first or second lien on assets, with market-rate interest and meaningful penalties for late payment. Unsecured notes behind senior debt are worth less than the paper they're printed on.
Include acceleration triggers and clear default remedies that don't depend on group action. If one founder can't act without the other's consent, the buyer only needs to neutralize one of you.
Read before you sign.