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A convertible note template is a legal document commonly used in startup fundraising. It is a debt instrument that converts into equity at a future date, typically during a future funding round. This type of financing is popular among early-stage startups as it provides a flexible and relatively simple way to raise capital without determining an immediate valuation.
The first section of a convertible note template typically includes the basic details of the note, such as the principal amount, interest rate, and maturity date. It also outlines the conversion terms, including the conversion price and any applicable discounts or valuation caps.
The second section of the template covers the events that trigger the conversion of the note into equity. This can include a future equity financing round, a change of control event, or the passage of a certain period of time. It also specifies the rights and preferences of the convertible note holders in relation to the equity they will receive upon conversion.
The third section of the template addresses the rights and obligations of the parties involved, including the rights of the investors and the responsibilities of the company. It may also include provisions regarding the use of proceeds, representations and warranties, and dispute resolution mechanisms.
The fourth section of the template typically contains representations and warranties made by the company to the investors. These statements assure the investors that the company has the necessary authority, assets, and licenses to carry out its business and that it has disclosed all material information.
The fifth section of the template covers the covenants and conditions that the company and the investors agree to follow. This can include restrictions on the company’s ability to incur debt or dispose of assets, as well as requirements for the company to provide regular financial statements and updates to the investors.
The sixth section of the template addresses the default and remedies provisions. It outlines the consequences of a default by either party and the available remedies, such as acceleration of the note, conversion into equity, or legal action.
The seventh section of the template includes miscellaneous provisions, such as the governing law, jurisdiction, and amendment process. It also specifies whether the convertible note can be transferred or assigned by the investors and whether it can be amended or waived without the consent of all parties.
The eighth section of the template contains the signatures of the parties involved, including the investors and the company representatives. It also includes a date line and a space for the notary public to validate the signatures.
The ninth section of the template includes any exhibits or schedules that are attached to the note. These can include financial statements, stock purchase agreements, and other supporting documents that are necessary for the transaction.
The tenth and final section of the template is the governing law and jurisdiction clause. This specifies the laws that govern the interpretation and enforcement of the convertible note and the jurisdiction where any disputes will be resolved.