A Convertible Note Purchase Agreement is a document used for creating convertible debt, a type of security frequently issued by startups when raising seed capital.
Convertible debt is a means of financing used by startups when raising seed capital. In convertible debt financing, the seed investor provides a loan to the startup that can be converted into equity (shares in the startup) upon a future event. The promise to allow the investor to convert the loan into equity is contained in a document called a Convertible Note Certificate and in the Convertible Note Purchase Agreement.
A Convertible Note Purchase Agreement is required to set out the terms of agreement to convert the loan into equity. The Agreement also sets out the details of the loan provided by the investor, the repayment date (in the event that the loan is not converted into equity), and the interest payments owed to the investor.
When drafting a Convertible Note Purchase Agreement, it is important to focus on a number of key clauses, in particular: