Convertible Note Term Sheet

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What is it?

A Convertible Note Term Sheet, also known as Heads of Terms, is a document that summarises the key commercial terms of a proposed convertible note issuance between a startup and an investor.

Why do you need it?

A Convertible Note Term Sheet is used when a startup seeks convertible debt financing through issuing convertible notes, a type of security issued by startups when raising seed capital. A Convertible Note Term Sheet is generally signed near the beginning of the transaction once preliminary terms of the financing have been agreed and before commencing detailed due diligence and drafting of the definitive agreements.

A Convertible Note Term Sheet is usually not legally binding. However, care must be taken as it may be perceived to create a moral commitment and can significantly affect a party's bargaining position at a later stage.

Key clauses to watch for:

When drafting a Convertible Note Term Sheet, it is important to focus on a number of key clauses, in particular:

  • Details about your company;
  • Details about the investor;
  • Value of the convertible notes issued;
  • Maturity date;
  • Annual rate of interest;
  • Price per share when divided by the aggregate number of outstanding shares in the company;
  • Discount offered per share to investors; and
  • Investment threshold required to trigger the automatic conversion of the convertible note into equity.

Convertible Note Term Sheet Document

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