A convertible debt agreement is a legal and financial document that outlines the terms and conditions of a loan made to a company. In the case of a convertible debt agreement, the loan can be converted into equity at a later date. This means that the lender has the option to convert their loan into shares of the company’s stock.
A sample convertible debt agreement typically contains several key sections that outline the details of the loan and the conversion process. These sections include:
1. Loan terms – This section outlines the basic terms of the loan, including the amount borrowed, the interest rate, and the repayment schedule. It may also include provisions for prepayment penalties or default.
2. Conversion terms – This section outlines the details of how the loan can be converted into equity. It may include details on the conversion ratio, which is the number of shares of stock the lender will receive for each dollar of debt converted. It may also include details on when the conversion can occur, such as after a certain amount of time has passed or if specific events occur.
3. Representations and warranties – This section outlines the representations and warranties made by both the lender and the company. For example, the lender may represent that they have the authority to enter into the agreement, while the company may represent that they have the necessary approvals to issue stock.
4. Covenants – This section outlines the promises made by both parties regarding the use of the loan funds and other matters. For example, the company may covenant to use the loan funds for a specific purpose, while the lender may covenant not to sell their shares of stock immediately after conversion.
5. Events of default – This section outlines the events that will trigger a default under the agreement. For example, failure to make a loan payment on time may be considered an event of default.
A well-drafted convertible debt agreement can be a valuable tool for companies seeking to raise capital. However, it is important to seek the advice of legal and financial professionals when drafting and negotiating such an agreement. With the right assistance, a company can structure a loan that meets its financing needs while protecting its interests and those of its lenders.