Convertible Loan Note Agreement Template

What is a Convertible Loan Note?

A Convertible Loan Note (CLN) is a debt instrument that can be converted into equity securities of the issuing company under certain conditions. It’s a flexible financing option that offers both debt and equity features.

Key Components of a Convertible Loan Note Template

A well-structured CLN template should include the following essential elements:

1. Parties to the Agreement

Clearly identify the names and addresses of the lender and the borrower.

2. Loan Amount and Interest Rate

Specify the principal amount of the loan and the interest rate to be charged.

Determine whether the interest rate is fixed or variable.

3. Maturity Date

Set a definite date when the loan principal is due for repayment.

4. Conversion Rights

Define the terms under which the lender can convert the loan into equity securities.

Specify the conversion ratio, which determines the number of shares the lender will receive for each dollar of the loan principal.

Outline any conversion premium that may be applicable.

5. Prepayment Rights

Address the borrower’s right to prepay the loan before maturity.

If prepayment is allowed, specify any prepayment premium or penalty.

6. Default and Remedies

Define events of default, such as failure to make interest payments or principal repayments.

Outline the remedies available to the lender in case of default, such as acceleration of the loan, foreclosure, or liquidation of assets.

7. Governing Law and Dispute Resolution

Specify the governing law that will apply to the CLN.

Choose a jurisdiction for resolving disputes.

Design Elements for Professionalism and Trust

To create a CLN template that conveys professionalism and trust, consider the following design elements:

Clarity and Conciseness: Use clear and concise language throughout the template. Avoid legal jargon that may be difficult to understand.

Organization: Structure the template in a logical and organized manner, using headings and subheadings to divide sections.

Consistency: Maintain consistency in formatting, font styles, and spacing throughout the document.

Professional Appearance: Use a professional font and layout that reflects the seriousness of the agreement.

Legal Review: Ensure that the template is reviewed by a legal professional to ensure its accuracy and compliance with applicable laws.

Example of a Convertible Loan Note Template Section

Conversion Rights

The Lender shall have the right, at any time prior to the Maturity Date, to convert all or any portion of the outstanding Principal Amount into Common Stock of the Borrower at a conversion ratio of [conversion ratio]. The conversion ratio shall be determined by dividing the Fair Market Value of the Common Stock on the date of conversion by the Conversion Price. The Conversion Price shall be [conversion price].

Conclusion

A well-crafted Convertible Loan Note template is a vital tool for structuring a flexible financing arrangement. By carefully considering the key components and design elements discussed in this guide, you can create a professional and trustworthy document that protects the interests of both the lender and the borrower.