Convertible Loan Note instrument
A Convertible Loan Note (or Convertible Note) is a type of promissory note, but with a crucial additional feature: it includes a provision allowing the loan (plus accrued interest) to be converted into equity (shares) in the company at a future date, usually upon the occurrence of a specific event like a subsequent funding round. It acts as a hybrid instrument, starting as debt but having the potential to become equity.
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Convertible Loan Note - A Flexible Way to Invest in a Startup
A Convertible Loan Note is a unique financial instrument that starts as a loan but can be converted into equity (shares) in a company at a later date. This is a great way for startups to raise money quickly while deferring the company's valuation until a future funding round. It's a flexible option that protects the investor's initial capital and gives them the potential for a significant return.
Issue of Notes
This section specifies the total amount of money the company is authorized to raise through convertible notes and their individual nominal value. It also clarifies that the notes are unsecured, meaning they are not tied to a specific asset of the company.
Interest and Repayment
The agreement defines the interest rate that will accrue on the outstanding loan amount. It specifies when this interest will be paid and also outlines the terms for repayment. The company may be required to repay the loan in full on a specific date, or the loan may be repaid early without penalty.
Conversion
This is the key feature of the agreement. It outlines the conditions for conversion, which is the process of turning the loan into shares. It specifies the event that triggers a conversion, such as a future funding round, and details the terms of conversion, including a discount on the share price for the investor.
Warranties and Covenants
The company provides warranties, promising that it has the authority to issue the notes and that doing so does not breach any existing agreements. The company also makes covenants, or promises, to maintain accurate records and not to enter into any agreements that could jeopardize the repayment of the loan.
Governing Law & Jurisdiction
This is a crucial section for any international agreement. It specifies which country's laws will govern the contract and which courts will have exclusive jurisdiction over any disputes. This provides a clear legal framework and a predictable path for conflict resolution.
Creating a Convertible Loan Note with Bind is the easiest way to document this type of investment. Our tool guides you to create a comprehensive and legally sound document that protects both the company and the investor. Once the agreement is ready, you can sign it electronically, making the entire process fast and secure.
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