Convertible Promissory Note

Convertible Promissory Note for Saudi Arabia

Convertible Promissory Note Template for Saudi Arabia

A Shariah-compliant Convertible Promissory Note template designed for use in Saudi Arabia, incorporating both conventional convertible note mechanics and Islamic finance principles. The document structures the investment relationship between the company and investor in a manner that complies with Saudi Arabian law and Shariah requirements, providing mechanisms for profit-sharing and equity conversion while avoiding prohibited interest-based arrangements. It includes comprehensive provisions for conversion rights, valuation mechanisms, and investor protections, all tailored to meet the specific requirements of Saudi Arabian commercial and Islamic banking laws.

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What is a Convertible Promissory Note?

The Convertible Promissory Note is commonly used in Saudi Arabia as a bridge financing instrument for companies seeking to raise capital while deferring valuation discussions. This document is specifically designed to comply with both Saudi Arabian secular law and Islamic finance principles, making it suitable for use in the Saudi Arabian market. It provides a structured framework for investment that converts to equity upon specified triggers, typically a qualified financing round or maturity date. The document includes essential elements such as the principal amount, profit-sharing mechanisms (as an alternative to interest), conversion terms, and investor rights, while ensuring all provisions are Shariah-compliant. It's particularly useful for early-stage companies and startups looking to raise interim financing before a larger equity round, while maintaining compliance with local legal and religious requirements.

What sections should be included in a Convertible Promissory Note?

1. Parties: Identification of the Issuer (Company) and the Noteholder (Investor)

2. Background: Context of the investment and purpose of the note

3. Definitions: Key terms used throughout the document, including Islamic finance terminology

4. Principal Amount: The investment amount and currency

5. Maturity Date: Date when the note becomes due and payable

6. Profit Rate: Shariah-compliant profit sharing arrangement (avoiding conventional interest)

7. Conversion Rights: Terms and conditions for converting the note into equity

8. Conversion Price: Formula or fixed price for conversion into shares

9. Automatic Conversion Events: Circumstances triggering mandatory conversion

10. Representations and Warranties: Statements of fact by the Issuer and Investor

11. Covenants: Ongoing obligations of the Issuer

12. Events of Default: Circumstances constituting default and remedies

13. Shariah Compliance: Provisions ensuring compliance with Islamic law principles

14. Assignment and Transfer: Rules regarding transfer of the note

15. Notices: Communication requirements between parties

16. Governing Law and Jurisdiction: Application of Saudi law and dispute resolution

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

1. Security: Optional provisions for securing the note with company assets

2. Board Observer Rights: Rights of the noteholder to attend board meetings, used for larger investments

3. Information Rights: Additional reporting obligations to the noteholder

4. Most Favored Nation: Protection ensuring the investor gets the best terms offered to other investors

5. Pre-emptive Rights: Right to participate in future funding rounds

6. Tag-Along Rights: Right to join in sale of shares by other shareholders post-conversion

7. Shariah Advisory: Appointment and role of Shariah advisor for ongoing compliance

8. Foreign Investment Provisions: Additional terms required for non-Saudi investors

What schedules should be included in a Convertible Promissory Note?

1. Conversion Notice Form: Template for exercising conversion rights

2. Capitalization Table: Current and post-conversion ownership structure

3. Calculation of Conversion Price: Detailed formula and examples of conversion calculations

4. Corporate Authorizations: Company approvals and board resolutions

5. Shariah Compliance Certificate: Certification from qualified Shariah advisor

6. Investment Amount Payment Schedule: If the investment is to be made in tranches

7. Permitted Investments: List of approved Shariah-compliant investments for company funds

Authors

Alex Denne

Head of Growth (Open Source Law) @ tiktok��˰� | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents

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A Saudi Arabian legal instrument acknowledging debt obligations where original documentation is missing, combining conventional financial practice with Sharia compliance requirements.

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Download a Standard Convertible Promissory Note

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What is a Convertible Promissory Note?

What sections should be included in a Convertible Promissory Note?

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

What schedules should be included in a Convertible Promissory Note?

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