What is a convertible note and how it works?

What is a convertible note?

A convertible note is a form of short-term debt that converts into equity, typically in conjunction with a future financing round; in effect, the investor would be loaning money to the company and instead of having the company return this money, the investor would receive equity in the company in return.

How does the convertible note work?

The convertible notes are usually drafted by a lawyer and would set out the particulars of the notes including amongst others, the process for conversion. The convertibles notes are also usually accompanied by a shareholders’ agreement. You may seek a lawyer’s advice for more information on convertible notes.

The lawyers assisting to prepare the convertible notes would also usually prepare all the relevant documents for the implementation and execution of the convertible notes.

Documents involved in convertible note

In general, these are the documents that are usually involved (these documents will vary depending on what is drafted by your lawyers and the process for conversion would depend on what is drafted in the convertible notes):

  1. Shareholders’ Agreement (if any)
  2. Convertible Notes
  3. Directors’ resolutions to approve the shareholders’ agreement and members’ resolutions to amongst others,  approve the entry into the convertible notes, and authorise Directors to issue shares pursuant to the conversion of the notes into shares (“Members’ resolutions”)
  4. Notice to seek agreement to the passing of the resolutions by written means
  5. Members’ resolutions (please note that a notice of resolution has to be filed with ACRA within 14 days from the passing of the members’ resolutions)
  6. Notice informing members of resolutions passed by written means
  7. Convertible note certificates (if required)
  8. Conversion Notice (if required)
  9. Directors’ resolutions to allot and issue conversion shares and authorise the issuance of share certificates
Please note that if preference shares or other classes of shares are involved, the company would need to first amend its Constitution before it may issue these shares.

Although Sleek does not assist to prepare these documents, we may assist to file the necessary notifications with ACRA and issue the share certificates to the respective shareholders upon the allotment of the conversion shares.

Please note that we will require all related documents including KYC documents of all new shareholders and proof of payment to be provided to us before we may file any notifications with ACRA.

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