Purchase Agreement for Convertible Note

License: Creative Commons Attribution 3.0 Singapore (CC BY 3.0 SG)

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Purchase Agreement for Convertible Note

This agreement (the Agreement) is made on

between:

(the Company and the Investor shall collectively be known as the Parties and each, a Party).

Whereas:

It is hereby agreed as follows:

  1. Definitions

    1. In this Agreement, except to the extent that the context otherwise requires, the following terms shall have the meanings set forth below:
    2. Qualified Financing
      Determines when the convertible note gets converted. E.g. when the company raises $1M round in the future The issuing of equity securities (Equity Securities) in a transaction or series of related transactions resulting in aggregate gross proceeds to the Company of at least S$, including conversion of the Notes and any other indebtedness.
  2. Subscription

    1. The Investor agrees to invest S$, (the Investment Amount) in the Company by way of the convertible promissory notes (the Notes) issued by the Company to the Investor in denominations of S$ each.
  3. Maturity Date

    1. The Notes and unpaid accrued interest on the Notes will be due and payable months from the date of the signing of this Agreement (the Maturity Date).
  4. Interest

    1. Interest Rate: This affects how much the investor effectively own when you convert.

      5% means a $100k investment is treated as $105k value, if you raise a $1M+ round in exactly a year.

      Most of the time this doesn't matter that much so of the 3 main negotiation points, this would be the least I am concerned with as a founder.

      Interest on the Notes will accrue on an annual basis at the rate of % per annum based on a 365 days year.
  5. Conversion Price

    1. The Conversion Price is the lesser of
      1. Discount Rate: i.e. if you raise the next round at $3M valuation, the current round investor effectively invested at 70% x $3M = $2.1M valuation.

        Useful for SEED round since no one really knows how to value companies properly and this saves all the back-and-forth debate on the right valuation and valuation methodology.

        % of the per share price paid by the purchasers of such Equity Securities in the Qualified Financing (the Discounted Conversion Price), or
      2. The CAP: this gives investor upside if you hit the ball out of the park. i.e. if you raise the next round at $20M, the current investors would still have invested at $5M, and has 4x their value (instead of 30% discount) the price per share equal to S$ divided by the aggregate number of outstanding shares of the Company's common stock as of immediately after the initial closing of the Qualified Financing (assuming full conversion or exercise of all convertible and exercisable securities then outstanding other than the Notes) (the Valuation Cap).
  6. Automatic Conversion

    1. Automatic Conversion in a Qualified Financing
      If the Company issues Equity Securities in a Qualified Financing, then the Notes, and any accrued but unpaid interest thereon, will automatically convert into the equity securities issued pursuant to the Qualified Financing at the Conversion Price.
    2. Automatic Conversion at the Maturity Date
      If the Notes have not been previously converted pursuant to a Qualified Financing, then, effective upon the Maturity Date, the Notes, and any accrued but unpaid interest thereon, will automatically convert into Equity Securities at 70% of the Valuation Cap.
  7. Optional Conversion

    1. If the Maturity Date or a Qualified Financing has not occurred, the Investor may elect to convert the entire Investment Amount into Equity Securities at the Valuation Cap.
  8. Sale of the Company

    1. If company sells before raising next big round. Investors get 1.5x or the exit value, whichever is higher. If a Qualified Financing has not occurred and the Company elects to consummate a sale of the Company prior to the Maturity Date, then upon the election of the Investor, either
      1. the Investor shall receive a payment equal to one and half (1.5) times the Notes, or
      2. the entire Investment Amount shall convert into Equity Securities at the Valuation Cap.
  9. Pre-Payment

    1. This says you can't just pay back the money with interest and buy the investor out.

      You'd be a douche if you try to sneak in a "i-can-buy-out-the-investor", I immediately walk away from a deal if someone try to sneak that in intentionally.

      The principal and accrued interest may not be prepaid unless approved in writing by Investors holding Notes whose aggregate principal amount represents a majority of the outstanding principal amount of all then-outstanding Notes (the Requisite Holders).
  10. Participation Rights

    1. Also known as "pro-rata rights". This gives investor the pre-emptive rights to be invest in your future rounds before other people do, to maintain their shareholding %.

      You can try to negotiate this out, but I won't advise it. This is a fair and important clause for any serious smart investor, and it would be fair to offer this even if most investors (esp angels) won't exercise it.

      After converting to Equity Securities upon the conditions laid out in clause 6 and 7, Investor will have the rights to participate in subsequent financing rounds of the Company in order to maintain their percentage (%) shareholding in the Company.
  11. Amendment and Waiver

    1. The terms of this Agreement and the Notes may be amended, or any term thereof waived, upon the written consent of the Company and the Requisite Holders.
  12. No Security Interest

    1. The Notes will be a general unsecured obligation of the Company.
  13. Investor Rights

    1. The Investor will have customary information and inspection rights, including receiving an annual budget, annual unaudited financial statements, quarterly unaudited financial statements, and any other information reports prepared for shareholders while the Notes remains outstanding.
  14. Fees And Expenses

    1. The Parties will bear their own fees and expenses incurred in the transaction.
  15. Governing Law and Jurisdiction

    1. This Agreement shall be governed by and construed according to the laws of Singapore.

As witness this Agreement has been signed by or on behalf of each of the Parties hereto the day and year first before written.

[COMPANY NAME]

Signed by [FOUNDER] for and on behalf of [COMPANY NAME]

in the presence of [WITNESS]

[INVESTOR NAME]

Signed by [Investor representative]

in the presence of [WITNESS]