What Are the Most Requested Terms in Convertible Note Agreements?
ContractsCounsel, a legal network where people can connect with lawyers to draft or review contracts, has found that clients usually request specific terms they want included in convertible note agreements. These include interest rates, maturity dates, conversion mechanics, valuation caps, and investor protections.
This research shows that it’s important to clarify and explain the conversion details and investor rights so that the agreement is transparent and fair.
Read on to learn more about the most requested terms in convertible note agreements, and how hiring a lawyer can help to draft them.
Note: Our data comes from real, anonymized project postings for convertible note agreements on the ContractsCounsel network.
1. Interest Rate
A leading request clients have when drafting convertible note agreements is interest rates. They want flexibility to choose if the interest compounds or it’s paid upon conversion.
Takeaway: The agreement should define the interest rate and accrual method. It’s essential to include payment timing so there’s no confusion regarding conversion and maturity.
2. Maturity Date
Convertible notes mature within 12 to 24 months. What happens afterward is important for clients to specify clearly. This could include getting paid, getting shares, or extending the terms.
Takeaway: The contract needs to have well-defined options for maturity dates and what happens afterward so that there are no disputes.
3. Conversion Terms, Discounts, and Valuation Caps
Clients request clear terms explaining how and when the conversion will occur. The discount they’ll receive, which is usually at a rate of 10-25%, needs to be included, as well as the valuation caps.
Takeaway: The agreement should include all the appropriate clauses: conversion triggers, discount rates, and valuation caps. Everyone involved needs to know how the ownership is calculated.
4. Investor Protections
Our data shows that investors often ask for protections like warranties, covenants, and most-favored-nation (MFN) clauses. This ensures they get the same deal if more appealing terms are provided later.
Takeaway: The convertible note should include investor protections that keep things fair for investors. Founders should have flexibility to grow their business.
5. Additional Provisions (Warrants, Collateral, and Dispute Resolution)
It’s common for clients to request additional terms, such as warrants for equity interest in the future, collateral that secures payment, and clauses for handling disputes.
Takeaway: If there are complicated deals, add extra clauses that cover issues such as security, resolution, and governance so all is clear and aligned.
6. Shareholder Agreements and Buyback Options
Some convertible notes, such as those for custom investments, tie into future shareholder agreements or include special terms like buyback options.
Takeaway: If you want your convertible note to address buybacks or milestones, these should be clearly defined so that both parties understand how they operate.
Why This Matters
ContractsCounsel’s data reveals that clients usually request specific terms for their convertible note agreements. These help everyone understand the conversion strategies and financial outcomes to be expected, while reducing risks and setting transparent expectations for future financing.
Get Help With Your Convertible Note Agreement
Post your project on ContractsCounsel. You’ll receive proposals from experienced and vetted startup and securities lawyers. They’ll be able to customize the convertible note to meet your financing requirements.
