Example of Convertible Note Agreement

A convertible note agreement is a type of investment that can be converted into equity in a startup at a later date. It is a popular form of financing for startups as it allows them to raise capital without having to agree on a specific valuation.

A typical convertible note agreement consists of several key elements:

1. Principal Amount: This is the amount of money that the investor is lending to the startup.

2. Interest Rate: The interest rate on the loan is typically low, as the investor is betting on the startup being successful and converting the note into equity.

3. Maturity Date: This is the date by which the note must be repaid. If the note is not converted into equity by this date, the startup must repay the principal plus any accrued interest.

4. Conversion Terms: This is the most important aspect of a convertible note agreement. It outlines the terms under which the note can be converted into equity. This can include a discount on the share price, a cap on the valuation, or a combination of both.

5. Events of Default: These are specific situations that may cause the note to become due and payable immediately. This can include a change of control of the startup or a default on the loan.

An example of a convertible note agreement might look like this:

«THIS CONVERTIBLE NOTE AGREEMENT (this «Agreement») is made as of the date set forth in the Purchase Agreement by and between the undersigned investor («Investor») and [Startup name] («Company»).

Principal Amount: $100,000

Interest Rate: 2% per annum

Maturity Date: 24 months from the date of issuance

Conversion Terms: The note will automatically convert into equity upon the closing of a qualified financing round of at least $1,000,000 at a discount of 10% to the share price issued in the financing round.

Events of Default: In the event of a change of control of the Company, the note will become immediately due and payable. The occurrence of any other event of default under the terms of the note will entitle the Investor to take appropriate legal action to recover the principal and interest owed.

This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior negotiations, understandings, and agreements between the parties.»

In conclusion, convertible note agreements can be a flexible and efficient way for startups to raise capital. By converting the note into equity at a later date, both the investor and the startup can benefit from the potential success of the company. It is important for both parties to carefully consider the terms of the agreement and ensure that they are in line with their goals and expectations.