Convertible Loan (Conversion) Agreement Template

Where you lend money to a company it can be a good idea to agree that the loan is converted into shares on the happening of a certain event. It can almost be used as a form of “bridging finance”. So you lend money to the company as a way of raising capital for them or to fund a large commercial agreement and after a passage of time (say when the large commercial agreement has been signed and is in full throttle) you convert the loan into shares. The Convertible Loan Agreement contains terms governing the timing and manner of such events and can be tailored as always to the specifics of the transaction.

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Step-by-step guide

1. This identifies the parties to the agreement. Here we have two companies identified by company number as well as name and registered address. This can be changed to individuals if you are not a registered company but remember to include full names and addresses.

2. The overview. Here we have a narrative of the background and the purpose of the agreement being that the money will be lent subject to a number of terms. Here if the loan is repaid by a certain date then it will be “converted” into shares in the borrowing company. Effectively then the “conversion” becomes an investment and the lending company becomes an investor. There are certain ways the investor can protect their investment and on conversion the agreement allows them a number of rights over the borrowing company or “founders” as they have become shareholders.

3. In return for making the loan, the lending company may acquire shares in the borrowing company if the loan is not paid back by the date set down in the schedule. The number and type of shares are laid out in the schedule. The borrowing company will transfer these shares and cannot claim what are called “pre-emption” rights which could previously have been attached to them. This means that in the first instance the new shares may have been offered to existing shareholders of the borrowing company and would have been transferred there before anywhere else. On the signing of this agreement this right is cancelled.

4. There follows the procedure to be followed on the transfer of shares including the board meetings and board resolutions that follow any share transfer and the agreement that the borrowing company will pass any such resolutions by voting in their favour.

5. In the event that the “Conversion” goes ahead and “triggers” the share transfer, it will take place within 7 days of non-payment of the loan and the share certificate will be issued.

6. Warranties and what are they? These are guarantees or promises about the company and as an investor they will provide you with assurances about certain facts and conditions surrounding the company. The warranties are laid down at Part 3 of the Schedule. So here the founders of the borrowing company are giving you assurances about the assets of the company, its financial records, structures and agreements etc. Basically the mechanics of the company are listed. Why does this affect you as an investor and now shareholder? If any of the warranties prove to be inconsistent with what is listed in the contract there is action you can take. At the end of the day you have potentially chosen to invest in a sound and viable company based on these warranties so if they are incorrect or have been misrepresented you can rely on this contract to pursue legal recourse which takes us to clause 4 (“Limitations”)

7. So further down the line you do find a problem with one of the warranties. You must present details of this in writing within 2 different time frames depending on the warranty. If it relates to a tax warranty you have 7 years to provide written notice to the company whereas with the other warranties you are time barred to 2 years so watch the clock! The company’s liability to you for such a claim is limited here to the total value of the loan you made together with your reasonable costs of bringing such a claim. So in any case you will only retrieve the money you put in at the start. In addition the money you claim must exceed the figure detailed at Part 1 of the Schedule so please consider this figure carefully.

8. Business Plan – Why is this here? Where the loan becomes converted to shares the company and its founders are under a duty to produce a business plan and a budget. At the end of the day cash has been injected into this company so this needs planning and consideration and in turn the information needs to be piped to the investor.

9. This agreement places certain restrictions on the founders (existing shareholders) and an assurance that each one is on a “service contract” which is an employment contract where they are employed or a similar contract where they are a director.

10. We end with the general provisions that appear in most legal agreements. The contract and what it entails is obviously confidential and other standard clauses with a signing clause to finish. There is also an option to “e-sign” where applicable for you to consider. With the particular arrangement here there is also a clause confirming the investor falls within the definition of a “high net worth” individual which satisfies a piece of legislation called

Document drafted by:

Clive Rich LawBrief

Clive Rich is a highly experienced entertainment and digital media lawyer, who has also successfully run digital businesses for companies such as Sony and Bertelsmann.

A qualified barrister, he has been a lawyer for almost 30 years and has drafted and crafted contracts for a broad spectrum of multi-nationals, major organisations and brands, including Yahoo, Apple, Napster, SanDisk, Myspace and the BBC.

He has also previously run his own legal practice, Rich Futures Ltd in association with the Top 30 UK law firm, Olswang LLP, representing a variety of technology companies and SMEs.

Clive is a qualified Mediator through the Centre for Effective Dispute Resolution (CEDR) and a qualified Arbitrator through the Central Institute of Arbitration (CIArb) in London.

As a negotiator, he is the author of “The Yes Book: the Art of Better Negotiation”, published by Random House in March 2013. Clive has also designed and successfully launched a negotiation App called “Close My Deal”, enabling people to understand the basis of successful negotiation and apply the skills to everyday scenarios. He has provided negotiating coaching and deal making services to a wide range of large organisations and SMEs. He has also been a board member of a number of digital SMEs.

Clive is a devoted father and husband, but when he is not spending time with his family, he likes to unwind by playing golf or watching a variety of sports (football, rugby, cricket). He’s a lifelong Milwall FC fan… but don’t hold that against him!

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