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A convertible note for a cross-border investment: an unsecured loan from one Investor that converts into shares on a qualified financing at a discount and/or under a valuation cap, with repayment or conversion on an exit, at maturity or on default, under a governing law and forum the parties choose, with an arbitration variant. Which early funding instrument fits (a SAFE, a convertible note, an advance subscription agreement or a priced round) is settled by the decision card (funding_instrument_choice), from the facts, not assumed from the draft.
International / Cross-Border
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This agreement is dated the date on which it is signed by the last of the parties.
This agreement is made between [TO BE CONFIRMED — Company legal name and details] (the "Company") and [TO BE CONFIRMED — Investor legal name and details] (the "Investor").
"Principal Amount" means [TO BE CONFIRMED — Principal amount (with currency)].
"Funding Date" means [TO BE CONFIRMED — Funding date].
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"Interest Rate" means [TO BE CONFIRMED — Annual interest rate] per annum.
"Maturity Date" means [TO BE CONFIRMED — Maturity date].
"Qualified Financing Amount" means [TO BE CONFIRMED — Minimum new money for a Qualified Financing].
"Valuation Cap" means [TO BE CONFIRMED — Valuation cap].
"Discount" means [TO BE CONFIRMED — Conversion discount].
"Fallback Valuation" means [TO BE CONFIRMED — Valuation for conversion at maturity, on an exit or on default].
"Exit Multiple" means [TO BE CONFIRMED — Exit return multiple].
"Default Rate" means [TO BE CONFIRMED — Default interest rate] per annum.
"Senior Debt" means [TO BE CONFIRMED — Senior debt (lender and facility)].
"Governing Law" means the law of [TO BE CONFIRMED — Governing law (country or state)].
"Courts" means [TO BE CONFIRMED — Courts with jurisdiction].
"Arbitration Institution" means [TO BE CONFIRMED — Arbitration institution and rules].
"Seat" means [TO BE CONFIRMED — Seat of arbitration].
"Business Day" means a day other than a Saturday, Sunday or public holiday in the place where the Company has its registered office.
"Conversion Amount" means the Principal Amount outstanding at the relevant time together with all interest accrued on it and not paid.
"Conversion Shares" means the shares issued to the Investor on conversion of the Note.
"Qualified Financing" means the first issue of new shares by the Company for cash after the date of this agreement, in one transaction or a series of related transactions, in which the total subscription price received in cash (not counting the conversion of the Note or of any other loan or convertible instrument) is at least the Qualified Financing Amount.
"Qualified Financing Shares" means the class of shares issued for cash to new investors in the Qualified Financing.
"Financing Price" means the lowest price per share paid in cash for Qualified Financing Shares in the Qualified Financing.
"Fully Diluted Share Capital" means the total number of shares of the Company in issue immediately before the relevant conversion, plus all shares that would be issued if every outstanding option, warrant and other right to acquire shares were exercised in full, plus all shares reserved for any employee share incentive plan (whether or not granted), but excluding shares to be issued on conversion of the Note or of any other convertible instrument converting at the same time.
"Fallback Price" means the Fallback Valuation divided by the Fully Diluted Share Capital.
"Exit Event" means a sale of shares in the Company as a result of which any person, alone or with persons acting in concert with it, holds more than 50 per cent of the voting rights in the Company; a sale of all or substantially all of the Company's business and assets; or a Listing.
"Listing" means the admission of any of the Company's shares to trading on a regulated or recognised securities exchange.
"Insolvency Event" means the Company being unable to pay its debts as they fall due; the appointment of a liquidator, administrator, receiver, trustee or similar officer over the Company or any material part of its assets; the Company starting or becoming subject to any insolvency, restructuring, composition or moratorium proceeding with its creditors generally; or the Company being dissolved or wound up.
"Ordinary Shares" means the ordinary shares or common shares of the Company or, if there is more than one class of them, the class most recently issued for cash.
In this agreement, a reference to a clause by its heading is to the clause of this agreement with that heading; the words "including" and "include" do not limit the words before them; the singular includes the plural; and, where the Investor is an individual, "it" and "its" include him or her, and "his" and "her", and a reference to the Investor's power and authority includes his or her legal capacity.
This agreement constitutes an unsecured convertible loan note of the Company in the Principal Amount (the "Note"), held by the Investor.
The Investor shall pay the Principal Amount to the Company on the Funding Date in cleared funds, to the bank account the Company notifies to the Investor in writing at least 3 Business Days before the Funding Date.
The Investor is obliged to pay the Principal Amount only if, before the Funding Date, the Company has delivered to it evidence that the directors, and the shareholders where the law of the Company's place of incorporation or its constitutional documents require, have approved this agreement and the issue of the Conversion Shares and dealt with any pre-emption rights over them, together with an extract from the company registry of that place showing the Company is validly existing, and any consent existing investors must give.
The Company shall use the Principal Amount only for the Use of Proceeds.
The Note is an unsecured obligation of the Company. Until it is converted or repaid, it ranks at least equally with all other unsecured and unsubordinated obligations of the Company, except obligations preferred by law and subject to the Subordination clause where it is included.
The Company shall keep a register of noteholders showing the Investor as the holder of the Note and, on request, issue the Investor with a certificate for the Note.
Interest accrues daily on the outstanding Principal Amount at the Interest Rate from the Funding Date until conversion or repayment, on the basis of the actual number of days elapsed and a 365-day year, as simple interest. If the law that governs this agreement, or the law of the Company's place of incorporation, sets a maximum rate of interest that the Interest Rate exceeds, the Interest Rate is reduced to that maximum and any excess already paid is credited against the Principal Amount.
Accrued interest is not payable in cash before the Note is repaid. On conversion, accrued interest forms part of the Conversion Amount and converts with the Principal Amount; on repayment, it is paid together with the Principal Amount.
Each party confirms that it has taken advice, or had the opportunity to take advice, on whether the Interest Rate and the Default Rate are lawful under any rule on usury or maximum interest of the Governing Law and of the law of the Company's place of incorporation, and neither party shall treat a reduction of a rate under the Interest clause as a breach of this agreement or an Event of Default.
If a Qualified Financing completes before the Note is repaid, the Conversion Amount automatically converts, on completion of the Qualified Financing, into Qualified Financing Shares at the Conversion Price.
The "Conversion Price" is the lower of the Financing Price reduced by the Discount, and the Valuation Cap divided by the Fully Diluted Share Capital.
If the Conversion Price, or any other price per share at which the Note converts under this agreement, would be less than the nominal value of the share to be issued, or any higher minimum issue price the law requires, it is increased to that amount.
On any conversion under this agreement, the number of Conversion Shares is the Conversion Amount divided by the price per share at which that conversion takes place under this agreement, rounded down to the nearest whole share. The Investor waives any fraction of a share.
If the Financing Price is stated in a currency other than that of the Principal Amount, the Conversion Amount is converted into that currency at the spot rate quoted by the Company's principal bank on the Business Day before completion of the Qualified Financing.
If an Exit Event occurs before the Note is converted or repaid, the Investor may, by written notice given before completion of the Exit Event, elect either to be repaid the Conversion Amount on completion or to convert the Conversion Amount, immediately before completion, into Ordinary Shares at the Fallback Price. If the Investor makes no election, the Company shall repay the Conversion Amount on completion.
If the Note has not been converted or repaid by the Maturity Date, the Investor may, by written notice given within 20 Business Days after the Maturity Date, elect either to be repaid the Conversion Amount or to convert it into Ordinary Shares at the Fallback Price. The Company shall complete the repayment or conversion within 10 Business Days after receiving the election. If the Investor makes no election in time, the Company shall repay the Conversion Amount within 10 Business Days after the end of the election period.
The Company may not repay or prepay the Note in whole or in part before the Maturity Date without the Investor's prior written consent, except as this agreement requires.
The Company shall give the Investor written notice of a proposed Qualified Financing or Exit Event, with its principal terms, at least 10 Business Days before its expected completion.
On conversion, the Conversion Amount is applied in paying up the Conversion Shares in full, and the Note is discharged to the extent of the amount converted.
On a conversion in a Qualified Financing, the Investor shall sign the shareholders' agreement and other investment documents signed by the new investors in that financing, on substantially the same terms, but is not required to give any warranty or undertaking other than as to its own title, capacity, authority and investor status.
The Company shall issue the Conversion Shares credited as fully paid, record the Investor as their holder in its register of shareholders, give the Investor evidence of its holding within 10 Business Days after conversion, and complete every notarial, registry or tax step that the law of its place of incorporation requires for the issue to be valid against third parties.
The Conversion Shares rank equally in all respects with the other shares of the same class then in issue.
While the Note is outstanding, the Company shall ensure that its directors are authorised under its articles of association and the applicable companies law to issue the Conversion Shares, and that all statutory and contractual pre-emption rights over the Conversion Shares are disapplied or waived.
While the Note is outstanding, the Company shall deliver to the Investor a copy of its annual accounts promptly after they are approved, and shall notify the Investor promptly after becoming aware of any Event of Default.
While the Note is outstanding, the Company shall not, without the Investor's prior written consent, create any security over its assets other than in the ordinary course of business; incur any borrowing that ranks ahead of the Note, other than the Senior Debt; pay any dividend or make any other distribution to its shareholders; or redeem or buy back any of its shares, other than from a departing founder or employee at no more than the price they paid.
The Company warrants to the Investor, on the date of this agreement and on the Funding Date, that it is duly incorporated and validly existing under the laws of its place of incorporation; that it has the power to enter into and perform this agreement and to issue the Conversion Shares, and has taken all corporate action needed to do so; and that entering into and performing this agreement does not breach its constitutional documents, any law binding on it or any agreement to which it is a party.
The Company warrants to the Investor that the information it has given the Investor in writing about its issued share capital, options and other rights to acquire its shares is complete and accurate at the date of this agreement.
The Investor warrants to the Company that it has full power and authority to enter into and perform this agreement and that its acquisition of the Note and the Conversion Shares complies with the securities and investment laws that apply to it, and that it qualifies under any exemption from registration or prospectus requirements on which the Company has told it in writing that it relies.
The Investor acknowledges that an investment in the Note is speculative, that it may lose the whole of the Principal Amount, and that it has made its own assessment of the Company and the investment.
The Company shall tell the Investor in writing, before the Funding Date, which exemption from registration, prospectus or licensing requirements it relies on in offering the Note and the Conversion Shares, and each party shall comply with the securities, foreign investment and exchange control laws that apply to it in connection with the Note. No Conversion Shares need be issued to the Investor before any approval those laws require has been given.
Each of the following is an "Event of Default": the Company fails to pay any amount due under this agreement within 5 Business Days after its due date; the Company materially breaches any other obligation under this agreement and, if the breach can be remedied, does not remedy it within 20 Business Days after written notice from the Investor; any warranty given by the Company is materially untrue when given; an Insolvency Event occurs; or the Company ceases, or threatens to cease, to carry on all or substantially all of its business.
At any time after an Event of Default occurs and while it is continuing, the Investor may by written notice to the Company declare the Conversion Amount immediately due and payable, and the Company shall pay it immediately.
If the Company becomes subject to a proceeding under an insolvency law, the Investor's right to accelerate the Note and to convert it, and the Company's obligation to repay, take effect only to the extent that the insolvency law applying in that proceeding allows, and the Investor may lodge a claim for the Conversion Amount in it.
If the Company fails to pay an amount when due, interest accrues on the overdue amount at the Default Rate from the due date until payment, before and after judgment, in place of the Interest Rate. The parties intend the Default Rate to compensate the Investor for the cost of late payment, and if the Governing Law or a mandatory rule of the place where the Note is enforced treats the Default Rate as a penalty or as excessive interest, it is reduced to the highest rate that can lawfully be enforced.
The Investor's right to payment under this agreement is subordinated to the Senior Debt. The Company shall not pay any amount under this agreement, other than by conversion, while any Senior Debt is due and unpaid or an event of default under the Senior Debt is continuing.
The Investor shall, at the Company's request, enter into a subordination or intercreditor agreement with the holders of the Senior Debt on customary terms, provided that it does not affect the Investor's conversion rights under this agreement.
The Investor may not transfer the Note, or any interest in it, without the Company's prior written consent, which shall not be unreasonably withheld or delayed, except to an affiliate of the Investor that first agrees in writing to be bound by this agreement.
The Company may not assign or transfer any of its rights or obligations under this agreement.
A transfer of the Note takes effect only when the Company has entered the transferee in its register of noteholders.
All payments under this agreement shall be made in the currency of the Principal Amount, in cleared funds, to the account the recipient notifies in writing.
The Company shall make all payments under this agreement without set-off or counterclaim, except to the extent that a mandatory rule of the law of the place where the Company is subject to an insolvency proceeding requires set-off.
The Company shall make every payment without deduction for tax unless the law of the place of payment or of the Company's residence requires one. If it does, the Company shall pay the deducted amount to the tax authority when due, give the Investor a receipt, and the net payment discharges its obligation. The Investor shall give the Company the residence certificate or treaty form it reasonably requests so that any reduced rate of withholding available to the Investor can be applied.
A notice under this agreement must be in writing and delivered by hand, by courier or by email, to the Company at [TO BE CONFIRMED — Company notice address and email] and to the Investor at [TO BE CONFIRMED — Investor notice address and email], or to any other address a party notifies to the other for this purpose.
A notice is treated as received on delivery if delivered by hand or courier, and at the time of transmission if sent by email unless the sender receives a message that it was not delivered. A notice received outside 9.00 am to 5.00 pm on a Business Day at the place of receipt is treated as received at 9.00 am on the next Business Day.
This agreement is the entire agreement between the parties about its subject matter and supersedes any earlier understanding between them about it. Each party confirms that it has not relied on any statement not set out in this agreement, but nothing in this clause limits liability for fraud.
A variation of this agreement is effective only if it is in writing and signed by both parties.
A failure or delay in exercising a right is not a waiver of it, and a waiver is effective only if given in writing.
If any provision of this agreement is or becomes invalid or unenforceable, it is treated as modified to the minimum extent necessary to make it valid and enforceable or, if that is not possible, as deleted, and the rest of this agreement is unaffected.
Nothing in this agreement makes the Investor a shareholder of the Company before conversion, or creates a partnership or agency between the parties.
Each party bears its own costs of negotiating and entering into this agreement.
Each party shall sign all documents and do all things reasonably required to give full effect to this agreement.
No person other than a party has a right to enforce any term of this agreement, to the extent that the Governing Law allows the parties to exclude such a right.
This agreement may be signed in counterparts and by electronic signature, each of which is an original and all of which together form one agreement, unless the Governing Law or the law of a party's place of signing requires another form, such as a notarised or witnessed signature, for a document to be valid there.
This agreement, and any non-contractual obligation arising out of or in connection with it, is governed by the Governing Law, without regard to its conflict-of-laws rules. The Company's capacity, the validity of the issue of the Conversion Shares and the rights attached to them remain subject to the mandatory law of the Company's place of incorporation.
The Courts have exclusive jurisdiction to settle any dispute arising out of or in connection with this agreement, and each party submits to their jurisdiction and waives any objection to them on the ground of venue or forum non conveniens. Subject to any treaty on recognition of judgments that applies, a party may enforce a judgment of the Courts in any country in which the other party is resident or holds assets.
This agreement is made in English. A translation into another language may be prepared for a court, registry or authority, and the party that needs it bears the cost, but the English text prevails except where a mandatory rule requires the local-language text to control.
A party that is not resident in the place of the Courts or the Seat shall, within 10 Business Days after signing, appoint an agent there to receive service of legal process on its behalf and give the other party the agent's name and address. Service on the agent is service on the party.