Convertible Note Agreement
Overview of this form
A Convertible Note Agreement is a legal document used by corporations to secure financing through loans from investors. This form outlines the terms by which investors lend money to a corporation, typically in exchange for the option to convert their debts into equity at a later date. Unlike traditional promissory notes, a Convertible Note Agreement allows for the possibility of converting the owed amount into shares of stock, at a valuation that is determined in a future investment round.
Key components of this form
- Details of the corporation and note holders, including names and addresses.
- Terms of the notes, including principal amount, interest rate, and maturity date.
- Conditions under which notes can be converted to shares of common stock.
- Representations and warranties by both the corporation and the note holders.
- Provisions concerning prepayment and events of default.
- Covenants related to corporate conduct during the term of the notes.
When to use this document
This form is typically used when a corporation needs to raise funds and opts for convertible notes as a financing method. It is commonly utilized during early-stage investment rounds, where the company seeks to delay the valuation process until a later funding event occurs. If you are a business looking to secure capital from investors while providing them with potential equity participation, this agreement is appropriate.
Who can use this document
- Corporations seeking to raise money from private investors.
- Investors looking to invest in a corporation through convertible debt.
- Legal professionals drafting financing agreements for clients.
- Startups or early-stage companies planning for future growth and investment.
Completing this form step by step
- Identify and enter the names of the corporation and note holders.
- Specify the loan amount, interest rate, and maturity date of the notes.
- Detail the conversion terms, including the conversion price per share and the circumstances under which conversion occurs.
- Include representations and warranties from both parties to confirm their legal standing and intentions.
- Sign and date the agreement where indicated, ensuring all parties retain a copy.
Notarization requirements for this form
This form does not typically require notarization unless specified by local law. However, notarization can add an extra layer of authenticity and protection for both the corporation and the note holders.
Get your form ready online
Our built-in tools help you complete, sign, share, and store your documents in one place.
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.
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.
Typical mistakes to avoid
- Failing to accurately describe the conversion terms, leading to confusion during future financing rounds.
- Not including all necessary parties, such as multiple investors.
- Overlooking the general corporate covenants that must be adhered to while the notes remain outstanding.
- Inadequately addressing events of default and their consequences, which may lead to disputes.
Why complete this form online
- Convenience of accessing and downloading the form anytime.
- Editability to tailor the agreement to the specific needs of the corporation and investors.
- Guidance on completing the form with user-friendly instructions.
- Reliability with legally vetted templates ensuring compliance with standard practices.
Legal use & context
- Convertible notes serve as a flexible financial instrument allowing corporations to defer valuation discussions.
- This agreement is enforceable under contract law and complies with securities regulations when properly executed.
- It is essential to include clear terms and accurate representations to protect all parties involved from legal disputes in the future.
Looking for another form?
Form popularity
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.