Sample Business Contracts

Promissory Note - NovaStar Financial Inc. and Scott F. Hartman

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                                PROMISSORY NOTE

$1,624,995.00                                      December 9, 1996

          FOR VALUE RECEIVED, the undersigned, Scott F. Hartman, promises to pay
to the order of NovaStar Financial, Inc., a Maryland corporation (the
"Company"), the principal amount of One Million Six Hundred Twenty-Four Thousand
Nine Hundred Ninety-Five and 00/100 Dollars ($1,624,995.00) with interest
thereon at Eight Percent (8%) per annum.  Certain capitalized and other terms
used herein shall have the meanings described in the Company's Private Placement
Memorandum dated October 15, 1996.

          Interest will accrue during the first year and on December 9, 1997
will be added to principal due under the note.  Thereafter, interest will be
payable quarterly.

          The original principal amount of this Note will be divided into three
equal tranches of Five Hundred Forty-One Thousand Six Hundred Sixty-Five and
00/100 Dollars ($541,665.00).  Payment of principal on each tranche will be
forgiven by the Company (and the interest accrued thereon during that quarter
will be immediately due and payable), if the following incentive performance
tests are achieved:

          .    During the first five fiscal periods after issuance of this Note:

               -  One tranche will be forgiven for each fiscal period as to
                  which the Company generates a total return to investors
                  purchasing Units in the Company's private placement equal to
                  or greater than 15%.

               -  At the end of each of the five fiscal periods, all remaining
                  tranches will be forgiven if the Company has generated a total
                  cumulative return to investors purchasing Units in the
                  Company's private placement (from date of initial issuance of
                  the Note) equal to or greater than 100%.

          .    For purposes of calculating the returns to such investors:

               -  The term "fiscal period" will refer to each of five periods,
                  the first commencing with the last closing of the Company's
                  private placement and ending on December 31, 1997, and each
                  succeeding fiscal period extending for twelve months and
                  ending on each December 31.

          .    The term "return" for each fiscal period will mean the sum of (on
               a per Unit basis) (a) all cash dividends paid during (or declared
               with respect to) such fiscal period per share of Preferred Stock
               (or per share of Common Stock following conversion of the
               Preferred Stock upon completion of a Qualified IPO), (b) any
               increase or decrease in the 

               price per share of Preferred Stock (or resulting Common Stock)
               during such fiscal period, measured by using the price per Unit
               to investors in the Company's private placement as the starting
               price ($15.00), and using the average public trading price during
               the last 90 days of each succeeding fiscal period for such
               succeeding periods, and (c) any increase or decrease in the price
               per Warrant during such fiscal period, determined in the same
               manner as in (b). For purposes of the fiscal period 15% return
               test, the total return for a given period will be equal to the
               sum of (a), (b) and (c) during the period, and for purposes of
               the cumulative 100% return test, the amounts in (a), (b) and (c)
               will all be measured from the beginning of the first fiscal
               period. The amount of that "return" will then be measured as a
               percentage of the investors' investment in the Units (on a per
               Unit basis) without regard to timing of receipt of dividends or
               timing of increases in per share or per Warrant prices.

     .         If one of the incentive tests is met, the amount of loan
               forgiveness for each tranche will be the principal amount of such
               tranche of the Note. In addition, a loan will be made by the
               Company to the undersigned in the amount of (i) personal tax
               liability resulting from the forgiveness of debt, and (ii)
               interest accrued during the first year on the forgiven tranches.
               The note will bear interest at a floating market rate, will be
               secured by that proportionate number of Units that had secured
               the forgiven tranche of the Note and will mature upon the earlier
               of the sale of those Units (or the underlying securities) or the
               termination of the officer's employment with the Company.

     .         At the election of the undersigned, the Company shall pay the
               premium on a term life insurance policy, the proceeds of which
               might assist the undersigned's estate or legal representative to
               cover the sums due under this Note, and the premium amount so
               advanced shall be added to the principal amount due the Company.

     Interest and principal shall be payable in full at maturity, which maturity
date is the earlier of (i) the sale of the underlying securities, (ii) the
termination of the undersigned's employment with the Company or (iii) December
31, 2001.

     This Note may be prepaid in full or in part at any time.  Each payment
hereunder shall be applied by the holder, first, to the payment of interest when
due, and the balance to the repayment of the principal sum.

     If default be made in the payment when due of principal and interest, then
the whole sum of principal and interest shall become immediately due and payable
at the option of the holder of this Note, without notice or demand.

     Promisor shall pay all costs and expenses, including reasonable attorneys'
fees, incurred by the holder hereof in the collection of this Note.

    This Note is secured by the One Hundred Eight Thousand Three Hundred
Thirty-Three (108,333) Units purchased by the undersigned in the NovaStar
Financial, Inc. private placement which is closing on the date hereof.

                                    Scott F. Hartman