“Every Startup’s In-house Counsel & Compliance Manager”

CONVERTIBLE NOTE
 SECTION 1

PRIMER ON CONVERTIBLE NOTE

 Introduction to Convertible Note

What is a Convertible Note?

A Convertible Note is a convertible loan. The holder of a Convertible note has the option to
either request for a return of the loan or convert the loan in to equity shares of the Startup to
which the loan is given.

It is a more convenient method of fundraising for a Startup, as unlike the conventional

instruments of Preference Shares, Equity Shares and Debentures, in case of a CN, a Startup has
to comply with lesser legal formalities for issuance of a Convertible Note. Hence, the cost and
time for receiving investments by a Startup when issuing a Convertible Note is lower as
compared to other modes of investments.

Key Features of a convertible note:

1. Only a recognised Startup can issue convertible notes.

Read more about how to get recognised as a Startup in our Articles section.

2. It has to be converted or repaid within 5 years

Under the Indian laws, a Startup has to convert the Convertible Note in to shares of the
Startup or repay the amount received through the Convertible Note within 5 years from the
date of issuance of the Convertible Note.

3. Minimum Investment Amount of INR 2.5 Million

A Convertible Note can only be issued by a Startup if it is receiving an investment of INR 2.5
Million or more in a single tranche.

STEP BY STEP -

1. Get a Startup India Recognition

Only Startups recognised by Government of India can issue

Convertible Notes. Therefore, the first step would be for you
to apply for a Startup India recognition, if you already are not
a recognised Startup. LexStart can help you with the Startup
India recognition process. Read our blog here or write to
support@lexstart.in for more details.

1
2. Get Board and Shareholders' Approval

A Convertible Note is after all a convertible debt. For any

Startup to take loans/debt, the Startup should have the
ability to accept such loan/debt under its Articles of
Association. If not, then the Startup will have to get approval
of its Board of Directors and Shareholders for issuing the
Convertible Note and accepting the loan/debt.

3. Draft a Convertible Note

A Convertible Note is a convertible loan/debt and hence like

any other loan/debt, comes with certain terms. These terms
of a Convertible Note will have to be captured in a short
agreement. The terms of a Convertible Note typically include
(a) tenure of the note, which cannot be more than 5 years, (b)
terms of conversion, i.e., if the loan were to get converted
then what would be the interest rate, when can the loan
convert to shares of the Startup, what will be the valuation of
the Startup at which the loan will convert in to shares of the
Startup, etc. Share you e-mail id here and we will send you a
template of Convertible Note for free!

4. Receive Money and Issue a Convertible Note

Once you have executed a Convertible Note Agreement, you

are ready to receive the investment. Your fundraising process
is now complete. You can issue a Convertible Note which is
like a share certificate of sorts.

2
 Convertible Note Vs. CCPS Vs. CCD

1. Time Taken For Issuance

Provided you don’t over negotiate, a Convertible Note can be issued in less than a week’s
time.Compulsorily Convertible Preference Shares (CCPS) and Compulsorily Convertible
Debentures typically take 4-6 weeks, sometimes more. for a return of the loan or convert the
loan into equity shares of the Startup to which the loan is given.

2. Process to be followed for a Convertible Note:

- Startup to get Board and Shareholders’ Approval

- Startup to file forms with ROC
- Investor to remit investment amount to Startup
- Startup to issue Convertible note

For CCPS/CCDs:

- Startup to open a new bank account

- Startup to get a valuation Certificate
- Startup to get Board and Shareholders’ Approval for increasing authorized share
capital and approving private placement
- Startup to issue offer letters to investors
- Startup to file forms with ROC
- Investor to remit investment amount to Startup
- Startup to get Board approval for allotment of CCPS/CCD
- Startup to file forms with ROC
- Startup to issue CCPS/CCD
- Startup to amend Articles of Association
- Startup to get Board and Shareholders’ Approval for amending Articles of Association

As is obvious from the above, while a Startup does not have to follow too many formalities for
issuing a Convertible Note, the number of formalities required to be complied with by a Startup
for issuing a CCPS or a CCD is far more. Thus making the CCPS/CCD instruments a more
expensive mode for receiving investments.

3. Valuation of the Startup

The biggest advantage of a Convertible Note is that unlike CCPS and CCD, it does not require
a Startup to determine the valuation at which the instrument will have to be issued or
converted.

3
 FAQ on Convertible Note

Q1. What is a Convertible Note?

A Convertible Note is a convertible loan. The holder of a Convertible Note has the option to
either request for a return of the loan or convert the loan into equity shares of the Startup to
which the loan is given.

Q2. Does a Convertible Note have a maturity/expiry date?

Under the Indian laws, a Startup has to convert the Convertible Note into shares of the
Startup or repay the amount received through the Convertible Note within 5 years from the
date of issuance of the Convertible Note.

Q3. Do I have to specify the time period within which the Convertible Note has to be
repaid?

The terms of a Convertible Note have to be decided upfront and specified in the Convertible
Note. Therefore, the time period will also have to be determined upfront.

Q4. Is there a minimum or maximum investment amount for issuing a Convertible Note?

A Convertible Note can only be issued by a Startup if it is receiving an investment of INR

2.5 Million or more in a single tranche. There is no maximum limit specified under the law.

Q5. I am not a Startup recognized by Government of India. Can I still issue a Convertible
Note?

Only recognized Startups can issue Convertible Notes. Having said that you can still take a
convertible loan from a director, shareholder or any company.

Q6. What is the difference between a convertible loan that I take from a director and a
Convertible Note?

Both are convertible debts. Only difference is that a convertible loan from a director will not
have to comply with the requirements of minimum amount and maximum time period like a
convertible note.

4
 SECTION 2

TEMPLATE OF CONVERTIBLE NOTE

 [To be printed on stamp paper of appropriate value]

CONVERTIBLE NOTE AGREEMENT

This Convertible Note Agreement is executed on this [Date] day of [Month], [Year] (“Effective Date”).

AMONGST:

[Name of Company receiving funding], a company incorporated under the Companies Act,
[1956/2013] and having its registered office at [Registered Office Address] (hereinafter
referred to as the “Company” which term shall unless repugnant to the context and meaning
thereof be deemed to mean and include its successors in interest and permitted assigns) of the
First Part.

AND

[Name of Investor], a [company/trust] incorporated under the laws of [Country] and having its
registered office at [Registered Office Address] (hereinafter referred to as the “Investor”, which
expression shall, unless it be repugnant to the context or meaning thereof, be deemed to mean
and include its successors in interest and permitted assigns) of the Second Part.

AND

[Name of the promoter of the Company receiving funding], an [Indian] citizen, residing at
[Address], India (hereinafter referred to as the “Promoter”, which term shall unless repugnant
to the context and meaning thereof be deemed to mean and include [his/her] respective legal
heirs, successors and permitted assigns) of the Third Part.

The Company, the Investor and the Promoter shall hereinafter, where the context so permits,
be collectively referred to as the “Parties” and individually as “Party”.

Whereas:

A. The Company is a private limited company, which is engaged inter alia in [Business of the
Company] (“Business”).

B. The Company requires funding for its business operations. Upon the request of the
Company, the Investor has agreed to make an investment in the Company in the form of
subscription to Note (defined later), on the terms and conditions as set out in this Agreement.

C. As used in the Agreement, the terms and expressions when used with the first letter
capitalized shall, unless the context otherwise requires, have the meanings assigned to such
terms and expressions in Annexure 1, or as defined elsewhere in this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this
Agreement, and for other good and valuable consideration, the sufficiency of which is
acknowledged by the Parties, the Parties hereby agree as follows:

5
1. INVESTMENT

On the Closing Date, subject to this Agreement and Applicable Law and subject to the
fulfilment of the Conditions Precedent listed in ANNEXURE 2 and other terms and conditions
of this Agreement, the Investor agrees to subscribe to and the Company agrees to issue to the
Investor, the Note upon the payment of the Investment Amount by the Investor to the
Company. The Conditions Precedent, conditions SUBSEQUENT and the actions and process of
Closing shall be as detailed in ANNEXURE 2.

2. REPRESENTATIONS AND WARRANTIES

The Investor has agreed to invest in the Company pursuant to Warranties given by the
Company and the Promoters, as detailed in ANNEXURE 3.

3. INVESTOR RIGHTS

3.1. Information Rights. As long as the Investor holds any Securities in the Company,
the Company shall, and the Promoter shall ensure that the Company shall provide to the
Investor such information that is reasonably requested by the Investor in writing from time to
time, within [No. of days] days from such request.

3.2. Pre-emptive Right. In the event the Company proposes to issue any further
shares, or any options, warrants or instruments or any appreciation rights and other Securities
convertible into Equity Shares or Preference Shares or otherwise, to any Person, prior to a
Qualified Equity Financing (“Further Issue”), then notwithstanding anything contrary contained
herein, the Investor shall have the right (but not the obligation) to require the Company to
convert the Note into the same instrument as being issued under the Further Issue based on
the conversion mechanism provided in Clause 4.1 as if such Further Issue was part of Qualified
Equity Financing.

3.3. Most Favoured Nation. As part of a Qualified Equity Financing, the Company
shall provide the Investor, a pre-emptive right (but not an obligation) to subscribe to the
Securities being issued under such Qualified Equity Financing Round, for an amount of up to
[Amount in number] ([Amount in words]) on the same price and terms as the Securities being
issued under the Qualified Equity Financing.

4. TERMS OF THE CN

4.1. The Preference Shares to be issued and allotted to the Investor upon conversion of the
Note shall be issued and allotted free from all encumbrances and shall, when allotted, be
credited as fully paid up. The terms of the Note are set out below and shall be mutatis mutandis
reproduced on the rear side of the certificates issued for the Note:

4.1.1. The holder of Note at the time of Qualified Equity Financing shall require the
Company to convert the Note into such number of Preference Shares as determined based on
the formula provided below, by issuing a notice to the Company (“Conversion Notice”).

6
 Number of Preference Shares Investment Amount
to be issued to Investor =
upon conversion of Note Discount Price

Where,
“Discount Price” = (Price per Security issued in the Qualified Equity Financing)*Discount Rate

“Discount Rate” = 100 - Discount, expressed as a percentage.

“Discount” shall be the discount to the preferred share price (P) of the next qualified financing
round expressed as a percentage for example if discount is 20% then Discount Rate is = 1- 20%
= 80% and the share price at which the CN converts to preferred shares is P x 80% and the
number of preferred shares the Company will issue to the CN holder is = CN Investment
Amount / (P x Discount Rate)

Please refer to Illustrations in ANNEXURE 5.

4.1.2. Redemption Right. In case of (i) non-occurrence of Qualified Equity Financing

prior to expiry of a period of [No. of Months] months from the Closing Date or (ii) any material
non-fulfilment or breach of any covenant of the Company or the Promoter set forth in this
Agreement or (iii) misrepresentation by the Company and/or the Promoter or (iv) fraud or gross
negligence or wilful misconduct by the Promoter, then the Investor shall have the right,
exercisable anytime after [Period] months, to require the Company to redeem all the Note/s.
The Company shall pay back to the Investor an amount equal to [No.] times of the Investment
Amount within [No. of Days] days of the date of request for redemption of Note by the
Investor.

5. COVENANTS

The covenants provided by the Company and the Promoter to the Investor are listed in
Annexure 4.

6. TERMINATION

6.1. This Agreement shall stand terminated in the following circumstances:

6.1.1. By written agreement of the Company, Investor and the Promoter.

6.1.2. By the Investor with a written notice to the Company and the Promoter.

6.2. The provisions of this Clause shall not affect the rights or obligations of Parties which
have accrued prior to termination.

7
7. CONFIDENTIALITY AND ANNOUNCEMENTS

No Party shall divulge or use confidential information relating to the other Parties obtained
from such Parties, at any time during the term of this Agreement or anytime thereafter, without
prior written consent of the disclosing Party or unless required by Applicable Laws or order or
any governmental authority. Provided that a Party shall be permitted to divulge the confidential
information to its employees, directors, officers, professional advisors (legal, tax, finance or
others), on a need to know basis, who shall strictly abide by the confidentiality obligation of
each of the Parties under this Agreement.

8. INDEMNITY

Notwithstanding anything contained in this Agreement or in any other document executed

among the Parties, the Company and the Promoter hereby agree to indemnify and hold
harmless, jointly and severally, the Investor, its officers, directors, employees, agents and
representatives (collectively, the “Indemnified Parties”) in respect of, and save and hold each of
the Indemnified Parties harmless against and pay on behalf of or reimburse each of the
Indemnified Parties as and when incurred, any and all losses, costs, damages and expenses
(including attorney fees), which any of the Indemnified Parties suffers, sustains, or becomes
subject to as a result of, or by virtue of, (i) gross negligence, wilful misconduct or fraud or (ii)
misrepresentation, by any of the Promoter or the Company.

9. GOVERNING LAW AND ARBITRATION

9.1. This Agreement shall be governed by and interpreted in accordance with the laws
of India.

9.2. Any dispute arising out of or in connection with this Agreement, including any
question regarding its existence, validity or termination, shall be referred to and finally resolved
by arbitration under the Indian Arbitration Act, 1996. The number of arbitrators shall be 3
(Three) with the Promoter (along with the Company if the Company is a party to such dispute)
and the Investor each nominating one arbitrator. The chairman of the Tribunal shall then be
chosen by the nominees through mutual consent. The seat, or legal place, of arbitration shall be
[Place]. The language to be used in the arbitration shall be English. The governing law of the
contract, the curial law and the law governing the arbitration clause shall be the law of India.
Each Party to a dispute shall bear its own cost and expenses, provided however that in the
event that Company is a party to a dispute then the cost and expenses of the arbitration shall
be borne by the Company.

MISCELLANEOUS

10. No failure of any Party to exercise, and no delay by it in exercising, any right under this
Agreement shall operate as a waiver of that right, nor shall any single or partial exercise of any
right under this Agreement preclude any other or further exercise of that right or the exercise
of any other right under this Agreement.

8
11. This Agreement shall be binding on the Parties and their respective successors and
permitted assigns. The Promoter or the Company may not assign or transfer any of their
respective rights or obligations under this Agreement without the prior written consent of the
Investor. The Investor may assign any or all of its rights under this Agreement to any Person
without any consent, prior or otherwise, of the Promoter or the Company.

12. Save and except as expressly provided in this Agreement, no amendment to this
Agreement shall be effective unless it is in writing and duly executed by each of the Parties.

13. All notices and other communications given under or pursuant to this Agreement shall
be in writing and be effective upon delivery to the applicable Party (whether by personal
delivery, registered pre-paid courier or email) at the address indicated in recitals.
14. Nothing in this Agreement shall, or shall be deemed to, constitute a partnership
between the Parties or constitute any Party as the agent of any of the other Parties for any
purpose.

15. This Agreement may be executed in any number of counterparts, all of which together
constitute one and the same agreement and a Party may enter into this Agreement by
executing a counterpart and delivery by email of a copy of any such executed counterpart shall
be deemed to constitute delivery of the original counterpart. Facsimile transmission or
electronic mail in portable format (“.pdf”) of an executed signature page of this Agreement by a
Party shall constitute, and be sufficient evidence of, due execution of this Agreement by such
Party.

[Signature pages separately attached]

9
 ANNEXURE 1

Definitions

As used in the Agreement, the following and their cognate terms and expressions unless the
context otherwise requires, have the meanings assigned below:

1. “Act” means the (Indian) Companies Act, 2013 and, wherever applicable, the rules
framed there under and any subsequent amendment or re-enactment thereof for the time
being in force.

2. “Agreement” means this Investment Agreement and shall include any schedules,
annexures, or exhibits that may be annexed to this Agreement now or at a later date and any
amendments made to this Agreement by all the Parties in writing.

3. “Applicable Laws” means all applicable statutes, enactments, acts of legislature or

parliament, laws, rules, regulations, notifications, guidelines or policies of any applicable
jurisdiction; judgment, arbitral award, decree, orders or government approvals of, or
agreements with, any court or governmental authority, as may be in force from time to time.

4. “Board” means the board of directors of the Company.

5. “Business Day” means a day (excluding Saturdays and Sundays) on which banks
generally are open in [Place] for the transaction of normal banking business.

6. “Note/s” means the 1 (One) convertible note to be issued to Investor subject to and in
accordance with this Agreement and having the rights and privileges as detailed in this
Agreement.

7. “Charter Documents” mean the memorandum and the articles of association of the
Company or any other such equivalent constitutional documents of the Company or, as
applicable, any subsidiary.

8. “Equity Shares” means equity shares of the Company having face value of INR [Insert
amount in number]/- (Rupees [Insert amount in words]) each.

9. “Investment Amount” means an amount of INR [Insert amount in number]/- (Rupees

[Insert amount in words]), to be invested by Investor, in the Company subject to and in
accordance with this Agreement.

10. “Material Adverse Effect” shall mean any event(s) or condition(s) or change of
circumstance or state of facts that has a material adverse effect on (i) the assets, Business,
liabilities, conditions (financial or otherwise), of the Company; or (ii) the ability of the Company
to perform its obligations under this Agreement.

11. “Person” means any natural person, limited or unlimited liability company, corporation,
partnership (whether limited or unlimited), proprietorship, Hindu undivided family, trust, union,
association, government or any agency or political subdivision thereof or any other entity that
may be treated as a person under Applicable Law.

10
12. “Preference Shares” means preference shares of the Company [to be created] in the
authorized share capital of the Company, having face value of INR [Insert amount in number]/-
(Rupees [Insert amount in words]) each.

13. “Qualified Equity Financing” means a subsequent round of investment of at least INR
[Insert amount in number]/- (Rupees [Insert amount in words]) (by subscription to equity,
preference, debentures or other Securities) in the Company by reputed institutional investor(s)
in one or more tranches.

15. “Securities” means any and all classes and series of shares, Equity Shares, Preference
Shares, Notes, options, warrants, preference shares, convertible securities of all kinds,
debentures or any other arrangement relating to the Company’s share capital.

11
 ANNEXURE 2

Conditions Precedent, Closing and Conditions Subsequent

1. CONDITIONS PRECEDENT

The obligation of the Investor to subscribe to the Note is subject to the fulfilment of the follow-
ing conditions (“Conditions Precedent”) (except if any one or more of which is waived in
writing by the Investor) prior to the Closing Date; and in each case in a form and substance
satisfactory to the Investor:

1.1 The Company and the Promoter providing a certified true copy of the resolutions
passed by the Board at a Board meeting and the shareholders of the Company at a general
meeting by a special resolution, authorising the Company to borrow the Investment Amount,
issue Note and terms of conversion of the Note.

1.2 The Investor having received a certified true copy of a resolution of the Board,
approving the execution, delivery and performance of this Agreement.

2. CLOSING DATE

The Closing shall occur no later than [Period in number] ([Period in words]) Business Days from
the Effective Date (the “Closing Date”). However, if the Conditions Precedent are not
fulfilled and are not waived by the Investor, on or before [Period in number] ([Period in words])
Business Days from the Effective Date (unless another date is agreed by the Investor) this
Agreement shall, at the option of the Investor, stand terminated. For the purpose of this Agree-
ment, the term “Closing” shall mean completion by the Parties of their respective obligations in
accordance with Section 3 below.

3. CLOSING ACTIONS

On the Closing Date:

3.1 The Company and the Promoter shall provide a certificate to the Investor certify-
ing that the Warranties are true and complete in all respects as on the Closing Date and that
no Material Adverse Effect has taken place from the Effective Date until the Closing Date.

3.2 The Investor shall pay the Investment Amount, to the Company’s bank account,
such account to be notified to Investor in writing at least [3 (Three)] Business Days prior to the
Closing Date.

3.3 The Company shall issue the Note to the Investor and deliver to the Investor,
certificate for the Note.

4. CONDITIONS SUBSEQUENT
As soon as practicable after Closing and in any case within 30 (Thirty) days of the Closing Date,
the Company shall, and the Promoter shall cause the Company to complete all statutory and
regulatory filings required pursuant to the Closing and provide certified copies of all such filings
to the Investor.

12
 ANNEXURE 3

Warranties

The Company and the Promoter (hereinafter collectively referred to as the “Warrantors”)
hereby jointly and severally make the following representations and warranties (“Warranties”),
each of which is true and correct as of the date hereof and shall be true and correct as of the
Closing Date and shall be unaffected by any investigation or due diligence heretofore or
hereafter made by the Investor:

1. ORGANIZATION AND AUTHORITY

1.1 The Company has been duly incorporated and validly exists under the laws of
India.

1.2 The Company and the Promoter have the requisite power and authority to
execute and deliver this Agreement and all the other agreements contemplated hereby or
which are ancillary hereto and / or are required to consummate the transactions contemplated
by this Agreement and perform their respective obligations contemplated hereby.

2. FINANCIAL STATEMENTS

2.1 The Company has furnished to the Investor audited financial statements of the
Company since its incorporation and unaudited financial statements of the Company for any
period for which audited financial statements are not yet available (collectively, the “Financial
Statements”).

2.2 The Financial Statements are true and correct in all material respects.

3. COMPLIANCE WITH APPLICABLE LAWS

The Company has been compliant with Applicable Law, rules and regulations applicable to it
and regulations applicable to the Business.

4. CONDUCT OF BUSINESS

4.1 The Company has not indulged in any corrupt practices in dealing with its
customers or for getting business from clients or in any manner violative of the anti-money
laundering laws.

4.2 There is no other existing fact or circumstance that may have a Material Adverse
Effect on the ability of the Company to conduct its Business as currently conducted.

5. LITIGATION

No action, proceeding, arbitration, or governmental inquiry or investigation is pending or

threatened against the Company or the Promoter before any court, arbitration board or
tribunal or administrative or other governmental agency, nor is there is any basis for the
foregoing or circumstances likely to lead to the foregoing.

13
6. INFORMATION

The information, provided to the Investor during the preparation and negotiation of this
Agreement was provided by the Warrantors and their representatives and advisors in good
faith and, is true, complete, accurate and not misleading.

7. OTHERS

Neither the Promoter nor the Company has committed: (i) any criminal or unlawful act involving
dishonesty; or (ii) any breach of trust.

14
 ANNEXURE 4

Covenants

[Note to Draft: The covenants may differ depending on the circumstances and status of
the Company]

1. The Promoter hereby covenants that:

1.1 He shall at all times use and exercise, or refrain from using or exercising, his
voting rights (whether as member or director of the Company) so as to ensure (a) observance
of the terms of, and fulfilment and performance of his obligations undertakings, covenants and
agreements under this Agreement and (b) no Securities are issued with rights and terms
superior to Securities held by the Investor, without the prior written consent of the Investor.

1.2 He shall at all times ensure that no amendments are made to the Charter
Documents which may have the direct or indirect effect of prejudicing or diluting the rights of
the Investor under this Agreement.

1.3 He shall not take and shall ensure that the Company does not take any action
which may have an adverse impact on the rights and interests of the Investor.

1.4 He shall not transfer and shall ensure that none of his relatives or affiliates shall
transfer the Securities held by them in the Company without prior written consent of the
Investor.

1.5 The Company shall be the exclusive vehicle through which the Promoter shall
conduct the Business.

1.6 The Promoter shall not, and shall ensure that his affiliates do not, singly or jointly,
directly or indirectly, either by itself or in association with any other Person, or assist any other
Person to:

• directly or indirectly, engage or attempt to engage, own, manage, operate, join,

assist or have an interest or control in any business, or Person which carries on business, that
competes with the Business; or

• solicit for employment or employ, or assist any other Person to solicit for
employment or employ, any director or senior/ key management employees of the Company;
or

• canvass or solicit for orders from any Person for provision to such Person of
services similar to those being provided by the Company; or

• induce or attempt to induce any supplier or customers of the Company to cease

supplying or procuring or buying through the Company, or to restrict or vary the terms of
supply to or procurement through the Company.

15
 1.7 The Promoter will remain employed by the Company so long as Investor holds the
Note or any Preference Shares.

1.8 The Promoter acknowledges that the provisions of this Clause are reasonable and
are no more extensive than is reasonable to protect the interests of the Company and the
Investor.

1.9 If any intellectual property is developed by the Company or any employees of the
Company or the Promoter in relation to the Business, then the Company shall at all times have
complete ownership of such intellectual property.

2. The Promoter and the Company hereby jointly and severally covenant that in the event
the Company provides any rights to any Person which are more favourable to the rights
enjoyed by the Investor, prior to a Qualified Equity Financing such rights shall automatically
apply to the Investor.

16
 ANNEXURE 5

Examples to Illustrate Terms and Conversion mechanism

Example A.
Company issues CN of ₹75 Lakhs with a 25% discount and after 6 months a Series-A investor
is looking to invest ₹5 Crores at ₹20 Crores pre-money valuation. The company has 10,000
shares outstanding pre-Series-A.

The CN will convert at a discount of 25%

i.e. the CN converts as if ₹75 Lakhs / (1-25%) = ₹1 Crore was invested in the Company such
that the post-money was ₹20 Crores.
i.e. post the Series-A round,
CN Note ownership will be ₹1 Crore / ₹20 Crores = 5%,
Company will issue CN Note holder 667 Shares
Series-A investor ownership will be ₹5 Crore / ₹25 Crores = 20%
Company will issue Series-A investor 2,667 Shares

Example B.
Company issues CN of ₹75 Lakhs with an incremental 2.5% discount month on month and after
6 months a Series-A investor is looking to invest ₹4 Crores at ₹20 Crores pre-money valuation.
The company has 10,000 shares outstanding pre-Series-A.

The CN will convert at a discount of 2.5% x 6 = 15%

i.e. the CN converts as if ₹75 Lakhs / (1-15%) = ₹88.235 Lakhs was invested in the Company
such that the post-money was ₹20 Crores.
i.e. post the Series-A round,
CN Note ownership will be ₹88.235 Crore / ₹20 Crores = 4.41%,
Company will issue CN Note holder 559 Shares
Series-A investor ownership will be ₹4 Crore / ₹24 Crores = 16.67%
Company will issue Series-A investor 2,112 Shares

Example C.
Company issues CN of ₹50 Lakhs with a Valuation Cap of ₹5 Crores and after 9 months a
Series-A investor is looking to invest ₹2.5 Crores at ₹10 Crores pre-money valuation. The com-
pany has 10,000 shares outstanding pre-Series-A.

The CN will convert at the lower of Series-A pre-money valuation and the Valuation Cap, in this
case that is the Valuation Cap of ₹5 Crores i.e. the CN converts as if ₹50 Lakhs was invested in
the Company such that the post-money was ₹5 Crores.
i.e. post the Series-A round,
CN Note ownership will be ₹50 Lakhs / ₹5 Crores = 10%,
Company will issue CN Note holder 1,111 Shares
Series-A investor ownership will be ₹2.5 Crore / ₹12.5 Crores = 20%
Company will issue Series-A investor 2,778 Shares
[NOTE: Post the Series-A investment round the CN Note holder’s investment will effectively
become 8% as it will get diluted by the new investment]

17
Example D.
Company issues CN of ₹50 Lakhs with a Valuation Cap of ₹5 Crores and after 6 months a
Series-A investor is looking to invest ₹1 Crores at ₹4 Crores pre-money valuation. The compa-
ny has 10,000 shares outstanding pre-Series-A.
The CN will convert at the lower of Series-A pre-money valuation and the Valuation Cap, in this
case that is the pre-money valuation of ₹4 Crores i.e. the CN converts as if ₹50 Lakhs was
invested in the Company such that the post-money was ₹4 Crores.
i.e. post the Series-A round,
CN Note ownership will be ₹50 Lakhs / ₹4 Crores = 12.5%,
Company will issue CN Note holder 1,429 Shares
Series-A investor ownership will be ₹1 Crore / ₹5 Crores = 20%
Company will issue Series-A investor 2,857 Shares

[NOTE: Post the Series-A investment round the CN Note holder’s investment will effectively
become 10% as it will get diluted by the new investment]

There are lots of permutation and combinations to how you can structure a CN but what is
important is to agree on some of the basics and close an investment fast, please feel free to
reach out to team at LexStart for guidance on effectively and efficiently designing a CN that
works for you.

18
Disclaimer

This document has been made available by LexStart Consultancy Private Limited for informa-
tional purposes only and does not constitute advertising, solicitation, or legal advice. Neither
the transmission of the template of the agreement, nor the transmission of any information
contained in this document or the website (http://lexstart.in/#/index/convertible-note) is
intended to create, and receipt hereof or thereof does not constitute formation of, a lawyer-cli-
ent relationship. Internet subscribers and online readers should not rely upon this document
or the information contained in this website for any purpose without seeking legal advice from
a qualified lawyer practicing in the reader’s jurisdiction.

The information contained in this website is provided only as general information and may or
may not reflect the most current legal developments; accordingly, information on this website
is not promised or guaranteed to be correct or complete. LexStart Consultancy Private Limited
expressly disclaims all liability in respect to actions taken or not taken based on any or all the
contents of this website.

19