Convertible Note Agreement
Overview of this form
A Convertible Note Agreement is a financial document that outlines the terms under which a corporation can issue convertible promissory notes to investors. These notes are typically interest-bearing and have a specific maturity date. The agreement provides the terms under which these notes can be converted into equity shares at a later date, usually at a valuation established during a future funding round. This form is distinct from standard loan agreements as it includes provisions for converting debt into equity, making it suitable for startups and corporations seeking flexible financing options.
Main sections of this form
- Date and parties involved in the agreement.
- Details on the issuance of convertible notes, including principal amount and interest rate.
- Terms regarding the sale and purchase of notes and stock.
- Representations and warranties by the corporation and note holders.
- Conditions for prepayment and the conversion process into shares of stock.
- Events of default and corresponding remedies for note holders.
Situations where this form applies
This form is essential when a corporation intends to raise capital by offering convertible notes to investors. It is typically used during seed funding or early investment rounds when the company is not yet ready for a traditional equity financing that establishes a valuation. This agreement ensures clarity on the terms of lending, interest payments, and the eventual conversion of debt to equity, allowing both parties to understand their rights and obligations.
Intended users of this form
This legal form is primarily designed for:
- Corporations looking to raise funds through convertible notes.
- Investors or note holders interested in providing financing to startups or businesses in exchange for future equity.
- Legal and financial professionals assisting in structuring investment agreements.
How to complete this form
- Identify the date of the agreement and the parties involved, including the corporation and investors.
- Specify the principal amount for the convertible notes and the interest rate.
- Detail the terms for conversion of convertible notes into shares of stock, including the conversion price.
- Include representations and warranties to protect both the corporation and the investors.
- Gather signatures from authorized representatives of the corporation and note holders.
Notarization guidance
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
- Forgetting to include specific conversion terms or interest rates.
- Neglecting to have all parties sign the agreement.
- Not updating the agreement to reflect state-specific laws or regulations.
- Failing to define the remedies available in case of default by the corporation.
Benefits of completing this form online
- Convenient access to legal templates that can be downloaded and printed at any time.
- Editability to customize terms as per your specific needs before finalizing.
- Reliability of templates drafted by licensed attorneys with expertise in corporate law.
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.
Main things to remember
- A Convertible Note Agreement is crucial for corporations seeking flexible funding options.
- It allows for the conversion of debt into equity, which can attract investors.
- Complete the form carefully to ensure all terms are clearly defined and legally enforceable.
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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.