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Convertible Agreement
I need a convertible agreement for an early-stage investment in a startup, with a conversion cap and discount rate specified, and a maturity date of 18 months. The agreement should include provisions for automatic conversion upon a qualified financing round and optional conversion at maturity.
What is a Control Agreement?
A Control Agreement lets a lender maintain security over a borrower's bank account in New Zealand's secured lending framework. It creates a three-way arrangement between the lender, borrower, and the bank holding the account, giving the lender certain rights to monitor and control the account funds.
Under NZ's Personal Property Securities Act, these agreements help lenders perfect their security interest by establishing control over deposit accounts. The bank agrees to follow the lender's instructions about the account and won't let the borrower withdraw funds without the lender's permission. This becomes especially important if the borrower defaults on their loan or faces financial troubles.
When should you use a Control Agreement?
Use a Control Agreement when lending against deposit accounts or providing significant business loans in New Zealand. This agreement becomes essential if you need to secure funds held in a borrower's bank account as collateral, particularly for commercial lending arrangements or complex financing deals.
The timing matters most when dealing with high-value accounts, multiple banking relationships, or borrowers with variable cash flows. Put this agreement in place before the loan settlement date - waiting until financial stress appears is too late. Banks and lenders often require these agreements for revolving credit facilities, trade finance, and when lending to businesses with substantial working capital needs.
What are the different types of Control Agreement?
- Fully Blocked Control: The bank follows only the lender's instructions about the account, giving maximum security but less flexibility for day-to-day business operations
- Springing Control: Allows normal account access until a trigger event occurs, then switches to lender control - popular for operating accounts
- Partial Control: The borrower maintains limited access for specific transactions while the lender monitors activity
- Multi-Party Control: Used when multiple lenders share security interests in the same account, common in syndicated loans
Who should typically use a Control Agreement?
- Secured Lenders: Banks, finance companies, or other creditors who need to protect their security interest in deposit accounts
- Account Banks: Financial institutions holding the deposit accounts agree to follow the Control Agreement's terms and lender instructions
- Commercial Borrowers: Businesses seeking secured financing who must allow their accounts to be subject to lender control
- Legal Counsel: Draft and review agreements to ensure compliance with NZ's Personal Property Securities Act and banking regulations
- Bank Officers: Monitor and implement account restrictions, process payment instructions, and maintain compliance
How do you write a Control Agreement?
- Account Details: Gather complete bank account numbers, account types, and branch information for all accounts covered
- Party Information: Collect legal names, addresses, and authorized signatories for the lender, borrower, and account bank
- Security Terms: Document the underlying loan agreement details and specific security requirements
- Control Mechanics: Define how account restrictions work, including payment procedures and authorized instructions
- Default Triggers: Specify events that activate stricter control measures and their consequences
- Compliance Check: Ensure alignment with NZ's PPSA requirements and banking regulations
What should be included in a Control Agreement?
- Party Identification: Full legal names and details of the lender, borrower, and account bank
- Account Description: Specific account numbers, types, and locations covered by the agreement
- Control Provisions: Clear terms outlining the bank's obligations to follow lender instructions
- Default Mechanisms: Defined trigger events and resulting control changes
- Notice Requirements: Communication protocols between all parties
- Termination Conditions: Circumstances and process for ending the agreement
- Governing Law: Express reference to New Zealand law and PPSA compliance
What's the difference between a Control Agreement and an Account Agreement?
A Control Agreement differs significantly from an Account Agreement in both scope and purpose. While both deal with bank accounts, they serve distinct legal functions in New Zealand's financial framework.
- Purpose and Function: Control Agreements specifically enable lender control over deposit accounts as security, while Account Agreements establish basic rights and obligations between a bank and its customer
- Parties Involved: Control Agreements require three parties (lender, borrower, bank), whereas Account Agreements are bilateral between bank and customer only
- Legal Framework: Control Agreements operate under NZ's Personal Property Securities Act for secured lending, while Account Agreements fall under general banking and contract law
- Enforcement Rights: Control Agreements grant specific intervention rights to lenders, but Account Agreements focus on standard account operations and services
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