Convertible Note Agreement
About this form
A Convertible Note Agreement is a financial contract that outlines the terms of a loan provided by investors to a corporation. This agreement details how the loan can convert into equity at a future date, typically during a subsequent funding round. Unlike traditional loans, the Convertible Note Agreement allows investors to convert their debt into shares of the corporation, potentially leading to greater returns. It is essential for startups looking to secure funding while offering a flexible option for both parties involved.
Form components explained
- Details about the parties involved: The corporation and the note holders.
- Issuance of the convertible notes, including the principal amount, interest rate, and maturity date.
- Conditions for the sale and purchase of notes and stock.
- Representations and warranties by both the corporation and the note holders.
- Provisions for prepayment and conversion of the notes into equity.
- Covenants that specify ongoing commitments of the corporation.
- Events of default and their implications for both parties.
Situations where this form applies
This form is typically used by startups seeking funding from investors in exchange for equity. It is particularly useful when a corporation wants to delay setting a valuation until a later financing round or when engaging early-stage investors who prefer the potential for equity ownership. If you plan to raise capital and want to offer investors a convertible option, this agreement is essential.
Who can use this document
- Startup founders looking for early-stage investment.
- Investors who want to fund a corporation with the option to convert their investment into equity.
- Corporations that plan to raise funds without immediately setting a valuation.
- Financial professionals advising companies on investment agreements.
Completing this form step by step
- Identify the parties: Fill in the names of the corporation and the note holders.
- Declare the principal amount of the loan and the interest rate.
- Specify the maturity date and any installment payment terms.
- Review and input the representations and warranties applicable to both parties.
- Fill in the details regarding conversion terms and any covenants.
- Collect signatures from all parties involved to finalize the agreement.
Is notarization required?
This form does not typically require notarization to be legally valid. However, some jurisdictions or document types may still require it. US Legal Forms provides secure online notarization powered by Notarize, available 24/7 for added convenience.
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Make edits, fill in missing information, and update formatting in US Legal Forms—just like you would in MS Word.
Download a copy, print it, send it by email, or mail it via USPS—whatever works best for your next step.
Sign and collect signatures with our SignNow integration. Send to multiple recipients, set reminders, and more. Go Premium to unlock E-Sign.
If this form requires notarization, complete it online through a secure video call—no need to meet a notary in person or wait for an appointment.
We protect your documents and personal data by following strict security and privacy standards.
Mistakes to watch out for
- Failing to clearly define the terms of conversion to equity.
- Not including a maturity date, which can lead to confusion later.
- Inaccurately stating the interest rates or repayment terms.
- Omitting critical signatures or acknowledgments, rendering the agreement unenforceable.
- Ignoring state-specific guidelines, which can invalidate the loan terms.
Advantages of online completion
- Convenience of downloading and completing the document at your own pace.
- Editability allows customization to meet specific business needs.
- Access to a reliable and legally sound template drafted by licensed attorneys.
- Secure storage and easy retrieval of completed forms.
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FAQ
A convertible note is short-term debt that converts into equity. In the context of a seed financing, the debt typically automatically converts into shares of preferred stock upon the closing of a Series A round of financing.
Generally, convertible notes convert into shares (the Conversion Shares) at a qualified equity financing round (this term should be defined in the note and usually means a preferred financing round of a minimum size) at the lower of two different prices per share: (1) the price per share using the conversion cap (
The maturity date is a deadline for a preferred round, and only during a preferred round can a convertible note convert into equity. Let's say there was a maturity date of 2 years from the date of investment. If the company hasn't had a preferred round within 2 years, the investor could demand their money back.
No while convertible debt is outstanding, then Yes after it converts to equity. No repayment until sale of company. Repayment on fixed schedule. Repayment on maturity, or converted to equity and no repayment until sale of company.
The amount you're raising on the convertible note (say $500k), the conversion discount of the note (say 20%), the pre-money valuation cap of the note (say $4m), the percentage of your company which the VCs will take in your Series A (say 30%),
A convertible note cap sets the maximum valuation at which the investment made via the convertible note can convert into equity. Investors in the convertible note typically get converted at the lesser of the valuation of the next qualified priced round and the cap.
What happens to a convertible note if a company is acquired or merges with another company?Most convertible notes call for the note to be converted to common shares in the company at a pre-set price just before the acquisition/merger, often at the same price as the cap of the note.
A convertible note is a debt instrument that is convertible into shares of the issuer or another entity. They offer investors the downside protection of a debt instrument and the upside potential of an equity investment, but in return typically offer lower interest rates than straight debt instruments.