The Convertible Debt Agreement serves as a crucial financing instrument in the South African market, particularly for growing companies seeking capital without immediately setting a valuation. This document is typically used when a company needs interim financing before a larger equity round, or when parties want to defer valuation discussions while providing immediate capital. The agreement must comply with South African corporate law, tax regulations, and where applicable, exchange control requirements. It includes detailed provisions for loan terms, interest rates, conversion mechanisms, and shareholder rights post-conversion. The document is particularly popular in the startup ecosystem as it offers investors downside protection through debt while maintaining upside potential through equity conversion rights. The agreement needs to carefully balance the interests of both parties while ensuring enforceability under South African law.
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1. Parties: Identification of the Lender(s) and Borrower(s) with their full legal details
2. Background: Context of the agreement, including the purpose of the loan and the parties' intention regarding potential conversion
3. Definitions and Interpretation: Definitions of key terms and interpretation rules, including critical concepts like 'Conversion Price', 'Qualified Financing', and 'Maturity Date'
4. Loan Amount and Disbursement: Details of the principal amount, disbursement conditions, and drawdown procedures
5. Interest: Interest rate, calculation method, payment periods, and default interest provisions
6. Repayment Terms: Repayment schedule, prepayment rights, and maturity date provisions
7. Conversion Rights: Triggers for conversion, conversion mechanics, and pricing formula
8. Conversion Procedure: Step-by-step process for executing the conversion from debt to equity
9. Representations and Warranties: Standard and specific representations by both parties
10. Covenants: Ongoing obligations of the Borrower, including information rights and operational restrictions
11. Events of Default: Circumstances constituting default and corresponding remedies
12. General Provisions: Standard legal provisions including notices, amendments, governing law, and jurisdiction
1. Security: Include when the debt is secured by specific assets or guarantees
2. Board Observer Rights: Include when the lender is granted rights to observe board meetings prior to conversion
3. Anti-dilution Protection: Include when additional protection against share dilution is needed post-conversion
4. Information Rights: Include when specific reporting requirements beyond standard covenants are needed
5. Tag-Along Rights: Include when lenders need protection in case of sale of company shares
6. Most Favored Nation Clause: Include when protection against better terms being offered to future convertible debt holders is desired
7. Exchange Control Provisions: Include when foreign lenders are involved requiring South African Reserve Bank considerations
1. Conversion Formula: Detailed mathematical formula and examples for calculating the conversion price and number of shares
2. Form of Conversion Notice: Template notice to be used when exercising conversion rights
3. Drawdown Notice: Template for requesting disbursement of the loan amount
4. Shareholders Agreement Terms: Key terms to be incorporated into shareholders agreement upon conversion
5. Company Cap Table: Current and post-conversion capitalization table showing shareholding structure
6. Required Corporate Approvals: List of corporate approvals and resolutions required for conversion
7. Disclosure Schedule: Company disclosures against representations and warranties
Relevant legal definitions
Clauses
Relevant Industries
Technology
Startups
Financial Services
Venture Capital
Private Equity
Biotechnology
Green Energy
E-commerce
Software Development
Manufacturing
Healthcare
Professional Services
Relevant Teams
Legal
Finance
Corporate Development
Investment
Compliance
Treasury
Risk Management
Corporate Secretariat
Executive Leadership
Business Development
Relevant Roles
Chief Executive Officer
Chief Financial Officer
Investment Manager
Legal Counsel
Corporate Lawyer
Investment Director
Venture Capital Associate
Financial Director
Company Secretary
Compliance Officer
Fund Manager
Business Development Director
Startup Founder
Finance Manager
Corporate Development Manager
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