A Convertible Note Certificate is a document used in convertible debt financing, a type of security frequently issued by startups when raising seed capital.
The Convertible Note Certificate is a written promise to repay that debt at a specified time, with the option to convert that debt into equity (shares) in that startup upon the occurrence of a specified event.
In a convertible debt financing, the seed investor provides an interest bearing loan to the startup. In return, the startup issues the seed investor a Convertible Note Certificate that records the loan/investment amount and contains an important conversion feature: a promise to allow the seed investor the option to convert the debt amount into shares of the company upon a specified future event.
The terms of the convertible debt arrangement are usually defined in a Convertible Note Subscription Agreement.
When drafting a Convertible Note Certificate, it is important to focus on a number of key clauses, in particular: