The Convertible Note Agreement is a crucial financing instrument in the Indian startup ecosystem, combining elements of debt and equity financing. It is primarily used by early-stage companies seeking to raise capital while deferring company valuation discussions. The document, structured under Indian law, provides investors with the right to convert their loan into equity shares upon specific triggering events, typically during future funding rounds or at maturity. This agreement must comply with various Indian regulations, including the Companies Act, 2013, SEBI guidelines, and FEMA regulations for foreign investments. It includes detailed provisions for interest payments, conversion mechanics, investor rights, and company obligations, making it particularly suitable for bridge financing rounds or early-stage investments where immediate equity valuation may be premature or challenging.
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1. Parties: Identification of the Company (Issuer) and the Investor(s)
2. Background: Context of the investment and purpose of the convertible note
3. Definitions: Key terms used throughout the agreement including Maturity Date, Conversion Price, Qualified Financing, etc.
4. Subscription and Issue: Details of the note amount, subscription process, and closing conditions
5. Interest: Interest rate, calculation method, and payment terms
6. Repayment: Terms and conditions for repayment of the principal amount
7. Conversion Rights: Circumstances triggering conversion, conversion price calculation, and mechanics
8. Company Representations and Warranties: Standard company representations about authority, compliance, and financial status
9. Investor Representations and Warranties: Investor's declarations regarding investment capacity and understanding of risks
10. Information Rights: Company's obligations to provide financial and other information to the noteholder
11. Events of Default: Circumstances constituting default and consequences thereof
12. Transferability: Restrictions and conditions for transferring the note
13. Notices: Process for formal communications between parties
14. General Provisions: Standard clauses including governing law, amendments, and dispute resolution
1. Most Favored Nation: Ensures investor gets best terms if company issues notes with better terms, used in early-stage investments
2. Foreign Investment Compliance: Required when investor is foreign entity, covering FEMA compliance
3. Tag-Along Rights: Gives investor right to join in sale of company shares, used in larger investments
4. Board Observer Rights: Grants investor right to attend board meetings, used for strategic investors
5. Pre-emptive Rights: Gives investor right to participate in future rounds, used for strategic investors
6. Subordination Provisions: Required when company has existing debt or multiple note holders
7. Security Provisions: When note is secured against company assets
1. Schedule 1 - Note Certificate: Form of convertible note certificate with key terms
2. Schedule 2 - Conversion Mechanics: Detailed procedures and calculations for conversion
3. Schedule 3 - Cap Table: Current capitalization table of the company
4. Schedule 4 - Disclosure Schedule: Company disclosures against representations and warranties
5. Schedule 5 - Form of Conversion Notice: Template for investor to exercise conversion rights
6. Appendix A - Corporate Authorizations: Company board and shareholder resolutions approving note issuance
7. Appendix B - Compliance Certificates: Required regulatory and corporate compliance certificates
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