Approve Signatory Convertible Note Agreement Template For Free

An investor who purchases a convertible note is a lender of the issuing entity and is not entitled to stockholder rights (such as voting rights, dividends, etc.) until the note converts into equity.

However, convertible notes also have some drawbacks: they create debt obligations for the startup, dilute the founder's ownership and control, create misalignment between investor and startup incentives, and complicate the cap table and funding rounds by introducing multiple classes of shareholders with different ...

For this reason, convertible notes typically aren't secured (mostly because there are no meaningful assets to be used as collateral) and there are no personal guarantees on the part of the startup's founders.

Capital notes. A convertible debt security is one that gives either the investor or the issuer the option to convert it into another type of security at a specified date in the future. Often this will be ordinary shares in the issuer. Convertible securities have contained within them an embedded option.

Convertible notes give their holders the right to receive equity of the company on certain triggering events, such as: A future equity financing (known as a Next Equity Financing or Qualified Financing), usually led by an VC fund. A sale of the company.

If the company fails after issuing a convertible note and defaults on its obligations, its noteholders will probably be unable to get their initial seed money or investment back. If there's anything to be gotten, convertible noteholders will fall in line after secured debt holders and before shareholders.

Common provisions of a convertible debt financing include: The interest rate. Usually somewhere between 4% and 8%. The maturity date. Usually 12?24 months. A mandatory conversion paragraph. ... An optional conversion paragraph. ... A change of control provision. ... A conversion discount. ... A valuation cap. ... An amendment provision.

Each Purchaser understands that the Notes and the securities issuable upon exercise or conversion thereof are restricted securities within the meaning of Rule 144 under the Act, and must be held indefinitely unless they are subsequently registered or an exemption from such registration is available.

For example, an angel investor invests $300,000 in a startup as a convertible note. The terms of the note are a 20% discount and automatic conversion after a qualified funding round of $1 million.

A convertible note agreement is a legal document that outlines the terms and conditions of a loan that can be converted into equity in the future. Essentially, it's a way for startups to raise money without having to give away equity upfront.