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Equity Promissory Note for Canada

Equity Promissory Note Template for Canada

A comprehensive legal document governed by Canadian law that combines elements of a traditional promissory note with equity conversion features. It establishes a debt obligation that can be converted into equity shares under specified conditions, typically used in growth-stage financing. The document details the principal amount, interest terms, conversion mechanics, and related rights while ensuring compliance with both federal and provincial securities regulations. It includes provisions for conversion pricing, anti-dilution protection, and necessary corporate approvals under Canadian corporate law.

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Equity Promissory Note

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What is a Equity Promissory Note?

The Equity Promissory Note serves as a vital financing instrument in the Canadian business landscape, particularly for companies seeking flexible funding options. This document type bridges the gap between straight debt and pure equity financing, providing investors with the security of debt and the upside potential of equity participation. When implementing an Equity Promissory Note, parties must ensure compliance with Canadian federal and provincial securities laws, corporate regulations, and tax requirements. The document is commonly used in growth financing scenarios, bridge rounds, or when companies need to secure immediate funding while deferring equity valuation discussions. It includes detailed terms for principal amount, interest calculations, conversion mechanisms, and investor protection provisions, all structured within the Canadian legal framework.

What sections should be included in a Equity Promissory Note?

1. Parties: Identification of the Maker (borrower/issuer) and the Holder (lender) of the note

2. Background: Context of the transaction and relationship between the parties

3. Definitions: Key terms used throughout the document, including financial terms, conversion-related definitions, and corporate terminology

4. Principal Amount and Interest: Specification of the loan amount, interest rate, calculation method, and payment terms

5. Maturity Date: Date when the principal amount becomes due and payable

6. Conversion Rights: Terms and conditions under which the note may be converted into equity, including conversion price and mechanism

7. Conversion Procedures: Detailed process for executing the conversion, including notice requirements and documentation

8. Representations and Warranties: Statements of fact by the Maker regarding their authority, corporate status, and ability to issue equity

9. Events of Default: Circumstances that constitute default and the consequences thereof

10. Remedies: Rights and remedies available to the Holder upon default

11. Assignment and Transfer: Terms governing the transferability of the note

12. Notices: Process and requirements for formal communications between parties

13. Governing Law: Specification of Canadian law as governing law and jurisdiction

What sections are optional to include in a Equity Promissory Note?

1. Security Interest: Include when the note is secured by specific assets or collateral

2. Subordination: Include when the note needs to be subordinated to other debt obligations

3. Anti-dilution Provisions: Include to protect the Holder's conversion rights from dilution through corporate actions

4. Prepayment Terms: Include if early payment is allowed or restricted

5. Board Observer Rights: Include if the Holder is granted rights to observe board meetings

6. Information Rights: Include if the Holder is entitled to receive specific financial or corporate information

7. Registration Rights: Include if the converted shares will have specific registration rights

8. Tax Provisions: Include specific tax-related provisions if needed for tax planning purposes

What schedules should be included in a Equity Promissory Note?

1. Schedule A - Form of Conversion Notice: Template notice for exercising conversion rights

2. Schedule B - Description of Equity Securities: Detailed description of the equity securities issuable upon conversion

3. Schedule C - Capitalization Table: Current and post-conversion capitalization structure of the company

4. Schedule D - Calculation of Interest: Detailed methodology for interest calculation and examples

5. Schedule E - Security Agreement: Details of any security or collateral (if applicable)

6. Appendix 1 - Corporate Resolutions: Copies of relevant corporate resolutions authorizing the note issuance

Authors

Alex Denne

Head of Growth (Open Source Law) @ tiktok成人版 | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Jurisdiction

Canada

Document Type

Promissory Note

Sector

Banking

Cost

Free to use
Relevant legal definitions





































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Investment Manager

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