Convertible Promissory Note

A convertible promissory note is a debt instrument that is convertible into equity on the maturity date. It is commonly used in startup financing as they allow startup founders to raise capital in early-stage of financing without the need to establish an equity valuation immediately.

What is a Convertible Promissory Note?

1. Debt Instrument: It functions as a promissory note and represents a loan made by an investor to the company. The company promises to return the principal amount to the investor, usually with interest, on a specified maturity date.

2. Convertible Feature: The note can be converted into equity in the company, usually at a pre-determined conversion rate during a future financing stage. Investors may then convert their debt investment into shares of stock, usually at a discount or under specific terms compared to the valuation of the company in the next funding stage.

Key Features of Convertible Promissory Notes

• Interest Rate: Like a general promissory notes, convertible notes often have an interest rate that accrues over the term of the note.

• Maturity Date: Convertible notes have a maturity date, which is when the principal and any accrued interest are due. If the note is not converted before such date, the company may need to pay back the debt.

• Conversion Terms: The terms for converting the debt into equity usually include a conversion discount which is a lower purchase price for shares compared to the next financing stage of valuation or a valuation cap which is the maximum amount that can be converted.

Note: This guidance provides a general overview of using the Convertible Promissory Note. It is important to consult with legal professionals or financial advisors to ensure compliance with applicable laws and regulations.