Convertible Note Agreement | Reg D Compliant Template

A convertible note agreement is a contract under which an investor lends money to a startup, and the loan automatically converts into equity on defined triggering events rather than being repaid in cash. Convertible notes give their holders the right to receive equity of the company on certain triggering events, such as a future equity financing, usually led by a VC fund, or a sale of the company. The instrument is sometimes called a convertible promissory note, a bridge note, or convertible debt, and the labels are interchangeable in practice.

The distinction founders most often blur is between a convertible note and a SAFE (Simple Agreement for Future Equity). A SAFE is not debt: it carries no interest, no maturity date, and no repayment obligation, which is why Y Combinator popularized it for the friendliest rounds. A convertible note is genuine debt that sits on your balance sheet, accrues interest, and comes due on a fixed date. That difference matters when a round stalls. While convertible notes arguably offer investors more protection than SAFEs, they still fall short of the comprehensive protections and governance standards found in priced equity rounds. The note also differs from a plain promissory note, which simply documents a debt with no equity feature at all. If you need a straight lending instrument rather than a fundraising one, a promissory note template with cosigner options is the better starting point. The convertible note exists precisely because the parties expect equity, not a payoff, to close the loop.

A convertible note is a security, which is the single fact most first-time founders underestimate. Because it is debt that converts into stock, it falls squarely within the Securities Act of 1933, and an issuer must either register the offering or fit it inside an exemption. Since convertible notes are securities, they must be registered, or qualify for an exemption from registration, under the Securities Act. Registration is out of the question for a seed-stage company, so nearly every note round leans on Regulation D, the private-placement safe harbor under Section 4(a)(2).

In practice that means Rule 506(b) or Rule 506(c). Under Rule 506(b), a company can sell securities to an unlimited number of accredited investors and up to 35 other purchasers who are sophisticated, but the company cannot use general solicitation or advertising to market the securities. Rule 506(c) flips that trade: you may advertise the raise publicly, but every investor must be accredited and the company must take reasonable steps to verify that the investors are accredited investors, which could include reviewing W-2s, tax returns, bank and brokerage statements, and credit reports. A self-certified questionnaire is enough under 506(b); it is not enough under 506(c). You can read the SEC's own plain-language explanation in the Investor.gov summary of Rule 506 private placements before you pick a lane.

Two filing duties follow and both are easy to forget. Companies relying on Rule 506 must file a Form D electronically with the SEC after they first sell their securities. The deadline is unforgiving: Form D must be filed through EDGAR within 15 calendar days of the first sale. Then come the states. Federal exemptions like Reg D do not automatically exempt offerings from state requirements, and 46 states require a notice filing for Rule 506 offerings, which must occur in every state where investors reside. Skipping blue-sky notices is the classic landmine: failures to file timely create rescission risk that must be resolved before a Series A investor will close.

The textbook scenario is a seed or pre-seed raise where the company is too young to defend a fixed valuation. Pricing equity requires agreeing on what the business is worth, and at the idea-and-traction stage that number is a guess that can poison the founder-investor relationship. A note sidesteps the argument by deferring price to the next institutional round. The second common trigger is the angel check that arrives between rounds, the friend-of-a-friend who wants in now and will not wait for a formal Series A process to assemble. You take the money on a note and let it convert later on the same terms the lead investor negotiates.

Bridge financing is the third recurring use. A company that has raised a priced round but needs runway to reach the next milestone often layers convertible notes on top of existing equity, which is why practitioners still call them bridge notes. The instrument also fits the party round, where a dozen small investors come in at once and you cannot realistically negotiate a separate stock purchase agreement with each. One note form, one cap table entry per investor, done.

Two edge cases legitimately call for caution. If your investors include anyone who is not accredited, your 506(b) headcount matters, and a single investor over the 35 non-accredited limit can blow the entire exemption. And if the note may convert alongside employee equity grants, coordinate it with your governing documents early; the conversion mechanics interact with your authorized share count and your existing shareholder agreement covering drag-along and buy-sell rights. A note drafted in isolation from the cap table creates problems that only surface during due diligence.

• The principal and interest terms set the loan amount and the annual rate, typically a modest 4 to 8 percent that accrues rather than being paid in cash. Accrued interest converts into equity along with principal, so the investor's effective ownership grows the longer conversion is delayed.
• The maturity date fixes when the note comes due if no qualified financing has triggered conversion, usually 18 to 24 months out. If no qualified financing has triggered conversion, the note comes due, and in practice the parties usually amend to extend the term, convert at a pre-agreed valuation, or renegotiate; outright repayment is rare.
• The valuation cap sets a ceiling on the company value used to price the investor's conversion, rewarding early risk with a better share price than later investors pay. The most typical formulation makes the conversion price the lower of an agreed valuation cap and a discount to the new issuance price, usually 15 to 25 percent of the price per share in the next financing.
• The automatic conversion provision is the heart of the instrument. It stipulates the automatic conversion of outstanding principal and accrued interest into equity once a specified financing threshold, the Qualified Financing, is achieved. Our template defines that threshold in plain dollars so there is no ambiguity about what triggers it.
• The qualified financing definition carries more weight than its length suggests. The definition of qualified financing is one of the most frequently negotiated terms in a convertible note because it determines when automatic conversion occurs and the floor below which founders retain the right to raise equity without triggering the note's conversion mechanics.
• The investor representations, including accredited-investor status and investment intent, support your Regulation D exemption and belong in the closing binder. Pair them with the confidentiality posture you would expect from any sensitive financial negotiation, the same logic that drives a non-disclosure agreement for pitch decks and financials.

Delaware is the default home for venture-backed startups, and most convertible notes are drafted to Delaware law even when the founders live elsewhere. The reason is conversion: notes convert into preferred stock authorized under the Delaware General Corporation Law, and your charter and corporate bylaws drafted to §109 DGCL must reserve enough authorized shares to absorb the conversion. A note that converts into shares you have not authorized forces a charter amendment at the worst possible moment.

California layers its own securities rules on top of the federal exemption. The California Corporate Securities Law of 1968 requires a state notice filing for Reg D offerings sold to California residents, and the Department of Financial Protection and Innovation enforces it. California also applies aggressive worker-classification doctrine, which matters indirectly: if your early team is misclassified, that liability surfaces in the same diligence that scrutinizes your note round.

New York requires its own blue-sky compliance, and the Investor Protection Bureau under the Martin Act gives the Attorney General unusually broad anti-fraud authority over securities offered to New York residents. Notes sold to New York angels should be papered with the same disclosure discipline you would use for a registered offering, because the Martin Act does not require proof of intent to find a violation.

Texas has become a popular incorporation and operating alternative, and the Texas Securities Act requires a notice filing for 506 offerings with the State Securities Board. Texas founders frequently pair a note round with formal company records, and our articles of incorporation template filed same-day with the Secretary of State keeps the corporate foundation aligned with the financing. Across all four states, the federal preemption under NSMIA means states cannot block your raise on the merits, but they can and do require the notice filing and collect the fee.

You begin by entering the names of the company and each investor, then the principal amount of the loan and the date the funds will be advanced. From there the template asks for the interest rate and the maturity date, with sensible defaults of a single-digit accruing rate and an eighteen-to-twenty-four-month term that you can adjust to your deal. The next block is the conversion economics, where you set the valuation cap, the discount percentage, and the dollar threshold that defines your qualified financing. The form explains each field in plain language so you are not guessing what a cap actually does to your future ownership.

After the economics, you select your securities exemption, and the document adjusts the investor representations to match a 506(b) or 506(c) offering. You then choose the governing-law state, which sets the legal references and aligns the conversion language with that state's corporation law. Finally you generate the agreement in editable Word and a clean signature-ready PDF. Before you take a single dollar, calendar your Form D deadline and identify every state where an investor resides, because the document creates the security but the filings preserve the exemption.

The error that costs founders the most is treating the note as a private favor rather than a securities offering. People wire money to a friend, skip the Form D, ignore the state notices, and discover the gap years later when a Series A lead's lawyers run diligence and find an unperfected exemption with live rescission rights. The fix is cheap and the failure is expensive, which is the worst kind of avoidable problem. A close cousin is sloppy investor records: keep the accreditation questionnaires, the subscription documents, and the dated communications, because if anyone later questions your exemption those records are the only thing that resolves it.

The second cluster of mistakes lives in the conversion math. Founders set a valuation cap without modeling what it does to the cap table, then act surprised when accrued interest and a low cap hand early investors far more ownership than expected once conversion runs. Vague drafting compounds it: a qualified financing defined loosely, or an MFN clause written too broadly, lets a single noteholder hold up a reasonable amendment. Push for an amendment provision that allows changes to terms like maturity or the qualified financing threshold with consent of noteholders representing a defined majority of principal, which prevents one obstinate investor from blocking a sensible modification. Finally, founders forget to reserve enough authorized shares for conversion, turning a routine close into an emergency charter amendment.