Overview of a Convertible Note Instrument

What is a Convertible Note Instrument?

Convertible Note Instrument is a debt instrument that converts into equity under predefined conditions, typically in qualified financing, at a liquidity event, or on a maturity date.

To raise funds by issuing convertible notes, you may either use a Convertible Note Instrument or a Convertible Note Subscription Agreement. If you have multiple investors subscribing for the same note, you should use the Convertible Note Instrument.

Contrary to a Simple Agreement for Future Equity (SAFE), a convertible note created under a Convertible Note Instrument is interest-bearing, has a maturity date, and specifies a minimum amount of funds to be raised at the equity financing.

Key points included

  • Aggregate principal amount;
  • Interest rate;
  • Maturity date;
  • Discount rate;
  • Valuation cap;
  • Qualified financing amount;
  • Additional optional clauses such as restrictions on dividend payments prior to conversion or pro rata rights; and
  • Nature of shares into which the note converts depending on the conversion event.

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