Raise money with a Convertible Note

What are the steps?

1.Get Shareholder approval through Shareholder Resolution to Issue Convertible Notes

2.Create a Term Sheet

3.Create a convertible note

4: Issue convertible note certificate 

Overview of a Convertible Note Instrument

To start, a convertible note is a debt instrument that converts into equity. Importantly, before the conversion takes place, the convertible note is a debt of the company. Basically, this means it has a due date on which the debt has to be repaid. This is called the “maturity date”. Interest accrues during the period that the debt is outstanding.

In a nutshell, a convertible note entitles its holder to convert the money paid for the notes into equity of the company at a discounted price. After the conversion, the holder of the convertible notes will become a shareholder of the company. 

Essentially, these can offer both the business and seed investors leverage in pursuing major fundraising benefits. 

How to do it

Step 1: Shareholder approval

Issuing a convertible note requires approval by the shareholders of the company. You do this through a  Shareholder Resolution to Issue Convertible Notes. You should also prepare (or instruct your company secretary to prepare) the relevant minutes for the shareholder’s meeting approving the creation and issue of the convertible note. 

Step 2: Create a Term Sheet

A term sheet is a non-binding record of the major terms discussed between the company and the investor. You may create a term sheet for a convertible note to facilitate discussion. However, it is not absolutely necessary. Additionally, you may consider entering into a Confidentiality Agreement. This is useful during the negotiation process to protect the confidential information of your company.

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Step 3: Create a convertible note

There are two ways to create a convertible note:

• Create a Convertible Note Subscription Agreement for signing by the company and the investor. The benefit of using this approach is that there is only one document.

• Create a Convertible Note Instrument, to execute as a deed. Then each investor will issue a Convertible Note Subscription Letter to the company. This only sets out the principal amount. The benefit of using this approach is that once you create the Instrument, notes can be subscribed by multiple investors at multiple times using a short and simple document. 

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Step 4: Issue convertible note certificate

Upon the investor paying the principal amount to the company, the company must issue a Convertible Note Certificate to the investor. This certificate needs executing as a deed.

Client case study

George-Alexandru Tilita from 3DK Tech Limited uses Zegal to raise money with a convertible notes approved by the shareholder’s of the company.