A Convertible Note is a simple promissory note, usually bearing interest and payable at some future date. The unique aspects of a convertible note are:
A. It converts into equity in the company so long as certain agreed metrics are achieved;
B. Conversion rather than repayment is the usual intention of the parties
C. The usual events for conversion (a conversion event) could be some or all of:
1. Later financing acquired of an agreed minimum level;
2. Developmental milestones reached by the company; and/or
3. Strategic partnerships concluded with important companies;
The conversion into equity is usually at a valuation that is consistent with the valuation agreed to with investors in an investment round that occurs at a later time.
A Convertible Note Agreement with a company is a legal document that outlines the terms and conditions of a loan provided by investors to a company, with the intention of converting the loan into equity ownership in the future. This type of agreement is commonly used in startup financing rounds, where traditional valuation methods may be unreliable or challenging to determine. The convertible note agreement allows investors to provide funding to a company as a loan, which carries a predetermined interest rate and maturity date. However, instead of repaying the loan with cash, the company has the option to convert the loan into equity shares at a later point, typically during a subsequent financing round or when specific triggers occur. This agreement benefits both investors and the company. For investors, it provides an opportunity to invest early and secure a potential stake in the company's equity. It also offers an advantage if the company undergoes a significant valuation increase between financing rounds, as the loan can convert at a lower valuation. Additionally, it avoids the need for a precise valuation at the time of investment, saving time and costs. For companies, convertible notes provide a source of capital without immediately diluting existing shareholders' ownership and control. It allows companies to defer the valuation exercise to a later stage when more accurate assessments are feasible. Convertible notes are more straightforward and cost-effective compared to equity financing, as they involve fewer negotiations and legal requirements. Moreover, repayment in cash is not required unless a qualifying event, such as an initial public offering (IPO) or acquisition, doesn't occur. There are various types of convertible note agreements used in different scenarios: 1. Discounted Convertible Note: This type of convertible note offers a discount on the conversion price, enabling investors to acquire equity at a reduced rate compared to future investors. 2. Valuation Cap Convertible Note: This type defines a maximum valuation at which the loan can convert into equity, safeguarding investors from excessive dilution if the company achieves a high valuation in subsequent rounds. 3. Safe (Simple Agreement for Future Equity): Though not a convertible note technically, the SAFE is another instrument utilized in early-stage funding, which operates under similar principles. It offers flexibility and simplicity without determining an interest rate or maturity date. 4. Capped Convertible Note: This variant combines both the discounted and valuation cap features, providing investors with an advantage based on the better of the two options. Understanding the different types of convertible note agreements allows companies and investors to structure their funding arrangements to meet their respective needs and objectives. It is crucial for both parties to carefully negotiate and outline the terms within the agreement to ensure a fair and mutually beneficial outcome.
Para su conveniencia, debajo del texto en español le brindamos la versión completa de este formulario en inglés. For your convenience, the complete English version of this form is attached below the Spanish version.
