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How to create a Convertible Note Certificate
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What is a Convertible Note Certificate?
A Convertible Note Certificate is a certificate that evidences the investor’s title to the convertible note.
A company issues a Convertible Note Certificate after due payment of investment amount by an investor.
What is a Convertible Note?
A Convertible Note is a form of debt or investment. It is a short-term loan typically used in a startup environment. A Convertible Note is used by businesses to raise money. They can do so either through Convertible Notes or Equity. Essentially a Convertible Note is a loan that turns into ownership in the company. For instance, a founder, A, wants to start some business and is actively looking for capital and investor, B, truly believes in A’s idea so he wants to spend the money as Convertible Notes. So the investor loans the entrepreneur money, which will later convert into equity in the company. Some features of Convertible Notes are
Interest Rate: As an entrepreneur borrows some money from the investor, so he/she will have to pay interest on that money in the form of equity.
Discount: after the convertible notes are converted into equity the investor will normally get a discount of 20-30% while buying the new equity.
When to use a Convertible Note Certificate?
When an investor is interested and ready to invest their money for any idea, they will make the investment as a Convertible Note. After making the investment a company will issue a Convertible Note Certificate to the investor. Basically, this certificate is issued to safeguard the investor’s money and provide them strong legal footing as a valid owner of those convertible notes.
What are the things to include in a Convertible Note Certificate?
A Convertible Note Certificate is a legal document that is issued to the investor after making an investment in a company to certify them as a valid owner of the convertible notes. These are the important things to include in a Convertible Note Certificate.
Date of Issue: The date on which this certificate was issued should be clearly written.
Amount: This includes the amount that an investor has invested in a company and in return, an equal amount of convertible note has been provided.
Company name: The name of the company along with the full address should be clearly written.
Investor name and address: This includes the name and address of the investor.
Signature of Director and a witness: The signature of the company director and signature of one witness should be included.
How do Convertible Notes work?
To understand how convertible notes work, we must understand when and why companies issue convertible notes. The most common situation is that a company is not prepared for a financing round yet, but could be in need of additional operating capital. Convertible notes in these cases could enable companies to secure funding without requiring a definite value upfront. This way investors can get an opportunity to acquire a stake in the company.
A Convertible Note is a debt instrument that converts into equity under predefined conditions, typically in qualified financing, at a liquidity event, or on the maturity date. After an investor invests in a company through a convertible note, they will be provided with a Convertible Note Certificate which acts as valid proof for investment.
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