The Convertible Loan Note Agreement is commonly used in the Indian startup and growth company ecosystem as a bridge financing tool. It provides companies with immediate access to capital while offering investors the flexibility to convert their investment into equity at a later stage, typically during a future funding round or upon reaching specific milestones. This type of agreement is particularly valuable when there is uncertainty about company valuation or when parties want to defer the valuation discussion. The document must comply with Indian regulatory requirements, including those under the Companies Act 2013, SEBI regulations, and RBI guidelines. It typically includes detailed terms about interest, conversion triggers, valuation caps, discount rates, and investor rights. This structure is especially popular among early-stage companies and venture capital investors in India, offering a balance between the security of debt and the upside potential of equity.
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1. Parties: Identification of the Lender and Borrower with complete legal details
2. Background: Context of the loan agreement, including purpose and commercial intent
3. Definitions: Key terms used throughout the agreement including Conversion Price, Conversion Event, Maturity Date
4. Loan Amount and Disbursement: Details of the principal amount and disbursement mechanics
5. Interest: Interest rate, calculation method, and payment terms
6. Repayment: Terms and schedule for repayment of the loan
7. Conversion Rights: Terms and mechanics for converting the loan into equity
8. Conversion Price and Mechanics: Detailed methodology for determining conversion price and process
9. Representations and Warranties: Standard declarations by both parties regarding their capacity and authority
10. Covenants: Ongoing obligations of the Borrower during the loan term
11. Events of Default: Circumstances constituting default and consequences
12. Governing Law and Jurisdiction: Specification of Indian law and jurisdiction
13. Notices: Communication protocols between parties
14. Assignment and Transfer: Rules regarding transfer of rights under the agreement
15. Confidentiality: Provisions for maintaining confidentiality of the agreement and related information
1. Security: Include when the loan is secured by specific assets or guarantees
2. Board Observer Rights: Include when Lender requests right to appoint observer to company board
3. Information Rights: Include when Lender requires specific financial or operational information access
4. Anti-dilution Protection: Include to protect conversion rights against dilution events
5. Tag-Along Rights: Include when Lender wants right to participate in future share sales
6. Most Favored Nation: Include when Lender wants protection against better terms given to future lenders
7. Foreign Investment Compliance: Include when Lender is a foreign entity, addressing FEMA compliance
1. Schedule 1 - Conditions Precedent: List of conditions to be satisfied before loan disbursement
2. Schedule 2 - Form of Conversion Notice: Template for exercising conversion rights
3. Schedule 3 - Cap Table: Current and post-conversion shareholding structure
4. Schedule 4 - Company Information: Key corporate and financial information of the Borrower
5. Schedule 5 - Drawdown Notice: Template for requesting loan disbursement
6. Appendix A - Calculation of Conversion Price: Detailed formula and examples for conversion price calculation
7. Appendix B - Compliance Certificate: Template for periodic compliance certification
Authors
Relevant legal definitions
Clauses
Relevant Industries
Technology & Software
E-commerce
Financial Services
Healthcare & Biotech
Manufacturing
Renewable Energy
Real Estate
Consumer Products
Education Technology
Media & Entertainment
Agriculture Technology
Professional Services
Relevant Teams
Legal
Finance
Corporate Development
Treasury
Compliance
Investment
Company Secretarial
Board of Directors
Executive Management
Relevant Roles
Chief Executive Officer
Chief Financial Officer
Investment Manager
Venture Capital Associate
Corporate Lawyer
Investment Banker
Company Secretary
Finance Director
Legal Counsel
Business Development Manager
Startup Founder
Private Equity Manager
Fund Manager
Compliance Officer
Treasury Manager
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