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What is a Convertible Note Instrument?
A 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.