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Aug 6th, 2022
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How to Correct answer in the Convertible Note Agreement Template

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[Music] hey its scott owner of cruise consulting and today were going over a sample convertible note agreement now were going to provide one here for you but your law firm will have this too and i generally believe that you should just work with a law firms template theyre gonna be the ones who document the deal use their template but this is helpful from informational standpoint this will actually teach you a lot and you know youll notice you know the amount is in there thats super important the term when the money basically has to be paid back or the note needs to be extended is a really important one the valuation cap super important weve gone over that in a couple different videos um and then youre also gonna you know have the the portion about whether its converting the common or preferred most of the time if you have especially if you have institutional vcs always going to be preferred but just scan through this convertible note template its youll see its not very l

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A Convertible Note is a type of financial document, which allows companies to exchange equity or other non-tangible assets for a typically short-term loan. The Convertible Note, like a promissory note, offers something such as equity in exchange for a payment.
Convertible notes are usually structured as a single agreement called the note purchasing agreement. This covers all of the financing terms. Promissory notes are then issued to individual investors with the date and amount of their investment.
EXAMPLE: A startup company with 1,000,000 shares of common stock closes a seed funding round of $1,000,000 in the form of a convertible note, with a valuation cap of $5,000,000 pre-money valuation on the next round of financing. For simplicity, assume the note carries a 0% interest rate.
The key terms in a convertible note are the interest rate, the maturity date, the conversion price, and the discount rate. The interest rate is the amount of interest that will accrue on the loan. The maturity date is the date when the loan must be repaid in full.
Returning to our convertible noteholder, the convertible price per share is the minimum between two values: Seed Investor Price Per Share (Valuation Cap Pre-Money Valuation) Seed Investor Price Per Share (1 Discount %)
Example: a Company issues a $1 million convertible P-Note with no discount and no cap. Subsequently, the Company obtains Series A financing at $20 million valuation. The loan would convert such that the investor would own 5% of the shares [=$1 million loan / $20 million valuation].
Convertible debt can be easier to issue than an equity investment because nothing needs to be changed in the companys shareholders agreement. Unless already a shareholder in the company, the lender is not party to the shareholders agreement until conversion of the debt.
Steps / Procedure and documents required to issue Convertible notes in India: Decide the amount to be raised and the terms of conversion of convertible notes. Prepare a convertible note agreement. Pass a board resolution to approve the convertible note agreement. Pass the EOGM to approve the issue of notes.

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