The Unsecured Convertible Promissory Note serves as a bridge financing instrument, particularly useful for companies seeking interim funding before a larger equity round. This document type is widely used in the Canadian startup ecosystem, providing a balanced approach between debt and equity financing. It details the loan amount, interest rate, maturity date, and conversion mechanisms, while complying with Canadian federal and provincial securities laws. The note's convertible nature offers investors the potential upside of equity participation while providing initial debt security. Key features include conversion triggers (such as qualified financing rounds), valuation caps, and discount rates. The unsecured nature means no specific company assets are pledged as collateral, making it a more flexible instrument for early-stage companies.
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1. Parties: Identification of the Lender and Borrower with their complete legal names and addresses
2. Background: Brief context of the loan arrangement and purpose
3. Definitions: Key terms used throughout the note including 'Conversion Price', 'Maturity Date', 'Qualified Financing', etc.
4. Promise to Pay: Core obligation stating the principal amount and promise to repay
5. Interest: Interest rate, calculation method, and payment terms
6. Maturity: Maturity date and repayment terms
7. Conversion Rights: Terms and conditions for converting the note into equity, including conversion price and mechanics
8. Conversion Mechanics: Detailed process for executing the conversion, including notice requirements and documentation
9. Events of Default: Circumstances constituting default and consequences
10. Representations and Warranties: Basic representations by the borrower regarding authority, binding nature, and no conflicts
11. General Provisions: Standard provisions including notices, amendments, governing law, and assignment restrictions
1. Qualified Financing Definition: Detailed terms of what constitutes a qualified financing event triggering automatic conversion, used when automatic conversion is desired
2. Prepayment: Terms allowing early repayment, if permitted
3. Security Interest: Although typically unsecured, can include negative pledge or other protective covenants
4. Information Rights: Lender's rights to receive financial information, included for sophisticated investors
5. Subordination: Terms regarding subordination to other debt, if applicable
6. Most Favored Nation: Protection ensuring the lender gets the benefit of better terms offered to future note holders
7. Change of Control: Provisions dealing with sale or merger of the company
8. Board Observer Rights: Rights of the lender to attend board meetings, typically for larger investments
1. Form of Conversion Notice: Standard form for the lender to execute conversion rights
2. Calculation of Conversion Price: Detailed methodology and examples of conversion price calculations
3. Cap Table: Current capitalization table of the company
4. Form of Shareholders Agreement: Agreement to be signed upon conversion, if applicable
5. Payment Schedule: If interest payments are periodic, schedule of payment dates and amounts
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