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Below you will find a Sample Convertible Promissory Note
Convertible Promissory Note
THE SECURITIES REPRESENTED HEREBY AND THE SHARES ISSUABLE UPON CONVERSION OF SUCH SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM, HOLDERS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.
EFFECTIVE DATE: __________, 20__
PLACE OF EXECUTION: __________________________
FOR VALUE RECEIVED, XYZ Corporation, an <State> corporation (“Company”), promises to pay to the order of ___________________________________, (“Holder”), in lawful money of the United States of America, the sum of __________________ and 00/100 Dollars ($___________.00) (the “Principal Sum”), plus simple interest, accrued on the unpaid Principal Sum from the Effective Date through the Maturity Date, payable as herein provided.
1. Interest Rate; Payment of Interest. During the period commencing on the date of this Note and ending on the Maturity Date, Interest shall accrue on the Principal Sum at a simple rate equal to __ (__%) per annum.
2. Maturity Date. The entire unpaid Principal Sum evidenced by this Note, together with accrued and unpaid interest, shall be due and payable in full on or before ______________ (the “Maturity Date”).
3. Prepayment. The Company may prepay any portion of this Note and accrued interest prior to the Maturity Date without the prior consent of the Holder.
4. Payment of Accrued Interest Upon Conversion. If the Company elects to prepay all or a portion of the Principal Sum, then at the time of such payment any accrued and unpaid interest due as of the date calculated on the amount of the payment shall also be paid to the Holder. If, according to Section 5 below the Company converts this Note, then all or the unpaid balance of the Principal Sum of the Note due and all accrued interest due as of the date of the conversion shall be considered the amount to be converted (the “Conversion Amount”).
5. Mandatory Conversion.
- a. Automatic Conversion in a Qualified Financing. If the Company issues equity securities (“Equity Securities”) in a transaction or series of related transactions resulting in aggregate gross proceeds to the Company of at least $__________, including conversion of the Notes and any other indebtedness (a “Qualified Financing”), then the Note, and any accrued but unpaid interest thereon, will automatically convert into the equity securities issued pursuant to the Qualified Financing at a conversion price equal to _______ (__%) percent of the per share price paid by the purchasers of such Equity Securities in the Qualified Financing. The Equity Securities issuable upon conversion of this Note shall be of the same type as the Equity Securities issued in the Qualified Equity Financing and shall otherwise be issued on substantially the same terms and conditions applicable to the Qualified Equity Financing. Upon any such conversion in connection with a Qualified Equity Financing, the Holder of this Note agrees to execute and deliver the same documents in the Qualified Equity Financing, if applicable, as are executed and delivered by the investors in such Qualified Equity Financing, as applicable, if any, that are not converting a promissory note.
- b. Conversion Procedure. If this Note is being converted into Equity Securities in connection with a Qualified Equity Financing, the Holder shall surrender the Note at the office of the Company for the applicable Equity Securities. Thereupon, there shall be issued and delivered to such Holder the applicable Equity Securities into which the Note surrendered was convertible on the date of the closing of the Qualified Equity Financing. The Company shall not be obligated to issue the Equity Securities issuable upon such conversion unless the Note being converted is either delivered to the Company or the Holder notifies the Company or any such transfer agent that such certificate has been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by Company in connection therewith. In lieu of the Company issuing any fractional shares to the Holder upon the conversion of this Note, the Company shall have the option to pay the Holder the unconverted amount of the Note, such payment to be in the form of cash or a Company’s check payable to the Holder. Upon conversion of this Note in full and the payment of the amounts specified in this Section 5, the Company shall be forever released from all its obligations and liabilities under this Note and such Note shall be deemed to be cancelled as of such time.
6. Events of Default; Holder’s Rights on Default.
- a. Events of Default. This Note shall be immediately due and payable on the Maturity Date as to the Principal Sum and all accrued and unpaid interest. An Event of Default shall occur upon any of the following: the failure of the Company to pay this Note in full on the Maturity Date or upon any of the following occurrences of the Company: (i) applying for or consenting to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) being unable, or admitting in writing its inability, to pay its debts generally as they mature, (iii) making a general assignment for the benefit of its or any of its creditors, (iv) being dissolved or liquidated, (v) becoming insolvent (as such term may be defined or interpreted under any applicable statute), (vi)commencing a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consenting to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) taking any action for the purpose of effecting any of the foregoing.
- b. Rights of Holder. On the occurrence or existence of any Event of Default, the Holder may declare the Principal Sum and all accrued interest under this Note to be immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived) and (1) the Principal Sum shall bear interest at the Default Rate of Interest (as defined below), (2) the Holder may immediately initiate legal action for the collection of this Note, (3) the Holder may immediately pursue the other remedies under applicable law that Holder deems appropriate. In the event of any default in the payment of this Note, or if suit is brought hereon, the Holder hereof shall be entitled to collect all reasonable costs and expenses of attorney’s fees, and the Company agrees to pay same in the event of such default.
- c. Security Agreement. This Note is secured by a Security Agreement dated of even date herewith between the Holder and the Company. Upon default on this obligation, the Holder may foreclose upon the security provided for in the Security Agreement and pursue any and all other rights provided by law.
- d. Shareholders. Officers and Directors Not Liable. In no event shall any shareholder, officer or director of the Company be liable for any amounts due or payable pursuant to this Note.
7. Default Rate of Interest. From and after the Maturity Date, the Principal Sum remaining unpaid shall accrue interest in an amount equal to (__%) per annum (the “Default Rate of Interest”).
8. Waivers. The Company waives demand, presentment for payment, protest, notice of protest and notice of nonpayment. Any discharge or release of any party who is or may be liable to Holder for the indebtedness represented by this Note will not have the effect of releasing any other party or parties, which will remain liable to Holder. Holder’s acceptance of payment other than in accordance with the terms of this Note, or Holder’s subsequent agreement to extend or modify the repayment terms, or Holder’s failure or delay in exercising any rights or remedies granted to Holder, will likewise not have the effect of releasing Company or any other party or parties from their respective obligations to Holder. In addition, any failure or delay on the part of Holder to exercise any of the rights and remedies granted to Holder shall not have the effect of waiving any of Holder’s rights and remedies under this Note. Any partial exercise of any rights and/or remedies granted to Holder shall furthermore not be construed as a waiver of any other rights and remedies, it being Company’s intent and agreement that Holder’s rights and remedies shall be cumulative in nature. Should any default event occur or exist under this Note, any waiver or forbearance on the part of Holder to pursue the rights and remedies available to Holder will bind Holder only to the extent that Holder agrees in writing to the waiver or forbearance.
9. Caption Headings. Caption headings of the sections of this Note are for convenience purposes only and are not to be used to interpret or to define their provisions. In this Note, whenever the context so requires, the singular includes the plural and the plural also includes the singular.
10. Notices. Any notice or other communication hereunder must be given in writing and either (i) delivered in person, (ii) transmitted by telefacsimile, provided that any notice so given is also mailed as provided in clause (iii), or (iii) mailed, postage prepaid, or by an overnight delivery service, as follows:
If to Company, addressed to:
If to Holder, addressed to:
Phone No.: __________________
Fax No.: ________________
SSN or EIN #: _________________________
or to such other address or to such other person as any party shall have last designated such notice to the other parties. Each such notice or other communication shall be effective (i) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (ii) if given by tele-facsimile, when transmitted to the applicable number so specified in (or pursuant to) this Section 10 provided that appropriate confirmation of receipt is generated by the tele-facsimile and a duplicate copy is mailed, postage prepaid, or (iii) if given by any other means, when actually delivered at such address.
11. General. The wavier by Holder of any breach of any provision of this Note or warranty or representation herein set forth will not be construed as a waiver of any subsequent breach. The failure to exercise any right hereunder by Holder will not operate as a waiver of such night. All rights and remedies herein provided are cumulative. Company may not assign its nights or delegate its duties hereunder without Holder’s written consent. This Note may not be altered or amended except by a writing signed by all the parties hereto. This Note will be governed by and construed and interpreted in accordance with the laws of the State of Delaware. Any provision hereof found to be invalid will not invalidate the remainder. All words used herein will be construed to be of such gender and number as the circumstances require. This Note Agreement binds Company, its successors and assigns, and inures to the benefit of Holder, its successors and assigns.
12. Legend. The Holder acknowledges that the Shares or other securities acquired upon the conversion of this Note may have restrictions upon their resale imposed by state and federal securities laws. The Shares (unless registered under the Act) or other securities shall be stamped or imprinted with a legend in substantially the following form:
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. COPIES OF THE OPERATING AGREEMENT COVERING THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.”
IN WITNESS WHEREOF, the Parties to this Agreement have executed the same on the date first written above.
THE COMPANY: XYZ CORPORATION, an <State> corporation
This sample has been provided in conjunction with Meyerdirk Consulting. MeyerdirkConsulting.com