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Also known as convertible promissory notes, bridge notes, or convertible debt. Since convertible notes are securities, they must be registered, or qualify for an exemption from registration, under the Securities Act.
Promissory Note. The Promissory Note (or Convertible Promissory Note) is the actual debt instrument in the deal. ... Note Purchase Agreement. ... Subscription Agreement. ... Note Holders Agreements and Voting Agreements. ... Subordination Agreement. ... Warrant to Purchase Stock.
Requirements for issue of Convertible Note (CN): 25 Lakhs or more in a single tranche. Convertible Note can either be repaid or can be convertible into such number of equity shares of such startup company. Repayment or conversion to happen within a period of five years from the date of issue of the convertible note.
Although it is customary to forego a term sheet, in some cases it may be required if the parties need to negotiate certain terms. It can be advantageous to use a term sheet for the company to easily summarize the terms of the notes for potential other investors purchasing a convertible note.
With convertible debt, a business borrows money from a lender or investor where both parties enter the agreement with the intent (from the outset) to repay all (or part) of the loan by converting it into a certain number of its preferred or common shares at some point in the future.
So the cash coming in from your convertible note will generally equate to the liability that you add to the balance sheet. And, if your accounting is doing a good job, the accrued interest is a non-cash expense that flows through your income statement and impacts your accumulated net income in the equity section.
Convertible loan notes can lead to dilution of existing shareholders' equity when the notes convert. This can be a disadvantage for start-ups that want to maintain control over their company.
A convertible note is a short-term debt agreement that converts into equity at a future date. Usually, this happens when one of these events takes place: The company raises enough capital to reach a pre-determined benchmark.