Convertible Notes

What is a convertible note?

A convertible note is a loan from an investor to your company. The loan must be into a company, as it can convert into shares in the company at a later point in time (if certain conditions of the convertible note are met). However, whether or not the convertible note does convert from debt into shares depends on the terms of the convertible note.

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What do I need to be ready to raise capital with a convertible note?

Before initiating a capital raise through the issuance of convertible notes, there are several preparatory steps to undertake. At a minimum, you should:

• review the company’s Shareholders’ Agreement to ensure the rights and obligations of the potential future shareholders are adequately considered and addressed (for example, if a convertible note converts into an equity position of 15%, consider if it affords the investor a right to appoint a director, and whether this aligns with the company’s commercialisation strategy)
• consider whether the company’s existing shareholders have a first right to contribute a loan, or a pre-emptive right to subscribe to a convertible note
• consider whether board or shareholder approval is needed to approve a convertible note raise, and
• consider and workshop the potential implications to the company’s capital table (and the founders’ interests) if all the funds raised via convertible notes convert into shares.

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