Convertible Note Investors Rights Agreement

An information subscription contract is very similar to a purchase agreement note (above) – most of the time, it`s just a name agreement. From time to time, however, you will see that subscription agreements are used to take some of the more complex terms of a note and in a separate subscription contract, so that the note and subscription contract work as two halves of a convertible debt. The effect of doing it this way is the same, it only allows for a simpler note and a more in-depth processing of conversion mechanics in a more traditional contractual format. I keep getting questions from clients who have not yet taken out convertible debt. If my clients often ask these questions, there are undoubtedly a variety of others that have the same. Send me an email to [email protected] or send me a tweet to @phwerner if you have a FAQ that you think should be added to the list! Compared to equity transactions, there are fewer business documents used in convertible debt transactions. For clarity, we divided them into “commonly used” and “used occasionally.” Readers should also keep in mind that this article speaks in generalities where concepts are usually covered – each agreement is different and a particular problem can be addressed in a different document in your deal. One of the complaints about convertible bonds at the beginning of the period is that they represent a capital risk for debt yields. People try to respond with the terms of the note – for example, caps for the conversion price and discounts on the conversion price. But these mechanisms do not fully correspond to the interests of the founders and bondholders, so that in order to address better than sometimes guarantees of purchase of shares instead or in addition to ceilings and discounts are given. It obviously makes the economic rating more like equity, since warrants are literally equity, but warrants bring a bit of complexity into what is supposed to be a simple transaction. You will find a more detailed discussion in the stock guarantees: soften the agreement for fishing investors. Proportional rights (also known as “participation rights” or “first refusal rights”) allow the rights holder to participate in future financing of the company.

We see this term in a minority of debt financing, but with increasing frequency – especially in financings where the main investor is an institutional investor (like a corporate fund). The calculation of how much a holder of these investment rights can invest in future financing, It is generally done in two ways: (1) by calculating the proportional share of the investor in the company`s scoreboard before financing (and after the conversion of bonds) – that is, the percentage of the heading table represented by the shares held by the investor or (2) by prior consent to a flat-rate cap that the investor can invest in future financing. In some limited cases, the company may accept that the investor`s proportional rights will continue beyond the next immediate financing, but in most cases the right would apply only to the immediate next financing and all future rights would be granted by the investor`s rights by holding the preferred shares he acquired in the financing in which the investor note was converted.