What Are Common Client Concerns in Convertible Note Agreements?
Startup founders and investors usually mention concerns when reviewing their convertible notes. Understanding all the terms in this note and ensuring they’re accurate is essential to having a legal document filled with clarity which reduces the risk of disputes.
ContractsCounsel provides insight into the most common concerns clients have about convertible notes, based on real project data. These include template accuracy, repayment, legal compliance, default protections, and valuation clarity.
Read on to learn about these main concerns and how lawyers can help to review them.
Note: Our research comes from real, anonymized convertible note review postings on ContractsCounsel, a legal network where clients hire experienced securities and startup lawyers to review their contracts.
Template Accuracy and Risky Provisions
Concern 1: Clients might use templates that lack essential investor protections. Or, they might contain unbalanced terms that favor one party.
How lawyers help: Hiring a startup lawyer can help you because they’ll review the agreement, checking for any missing or incorrect clauses.
Repayment and Conversion Mechanics
Concern 2: Clients want to have transparent, clear terms regarding how the note will convert to equity. Repayment conditions need to be specified.
How lawyers help: Attorneys will look at terms in the agreement, such as maturity and interest clauses. They’ll also explain how repayment responsibilities are meant to occur, and flag any terms that aren’t fair to both parties.
Valuation Caps and Share Allocations
Concern 3: Valuation caps can be challenging to understand. Some clients might not know how much they’ll own in the company.
How lawyers help: Lawyers will explain how valuation caps, discounts, and conversion prices work. Everyone must understand the contract’s financial outcomes before signing.
Issuer Trustworthiness and Legal Compliance
Concern 4: Some investors worry about whether they can trust the company. They need reassurance that it’s SEC-compliant and follows state securities laws.
How lawyers help: Lawyers will check compliance with regulations and follow-up on any required documents to be filed.
Negotiating Favorable Terms and Default Protections
Concern 5: Our data shows that it’s common for issuers and investors to want to negotiate terms, usually around maturity dates and conversion discounts. They want the convertible note to grant them this flexibility.
How lawyers help: A lawyer will review the note and ensure there’s a balance between investor protections and issuer flexibility. Throughout the process, they’ll check that all parties understand the clauses.
Seeking Legal Review
Concern 6: It’s common for clients to request a legal review of their convertible note, checking that it’s fair and complete.
How lawyers help: During the review, a lawyer will be thorough, checking for legal red flags or anything that doesn’t meet regulations and industry norms.
Key Takeaways
- Top concerns include note conversion terms, valuation clarity, and legal compliance.
- If a convertible note isn’t clear or is poorly drafted, it can cause repayment issues.
- Legal review ensures notes are complete, legally sound, and reasonable.
- Hiring a lawyer protects your financial interests.
Need help with your convertible note?
On ContractsCounsel, you can post your project and connect with experienced, vetted startup lawyers to review your convertible note.
