Convertible Promissory Note Template for the United Arab Emirates

A Convertible Promissory Note serves as a bridge financing tool that allows you to raise capital quickly while deferring complex equity valuations to a later date. In the UAE, this debt instrument converts into equity shares during a future qualified financing round, making it an attractive option for both startups and investors seeking flexible investment structures.

When do you need this document?

You'll need a Convertible Promissory Note when your startup requires immediate funding but you want to postpone equity dilution discussions until a larger financing round. This situation commonly arises when you're between funding rounds, need working capital to reach specific milestones, or want to secure investment from angel investors before institutional venture capital involvement. The note is particularly useful when market conditions make equity valuation challenging or when you're preparing for a Series A round but need interim funding to bridge the gap.

Key legal considerations

Your Convertible Promissory Note must clearly define the conversion mechanism, including the conversion price, discount rate, and valuation cap that will apply during the next qualified financing round. Interest rate provisions are crucial, as UAE law requires compliance with Islamic banking principles in certain contexts, and you must specify whether interest compounds and how it's calculated. Default provisions should outline consequences of non-payment and acceleration clauses that protect investor interests. The document must also address what happens if no qualifying financing occurs before maturity, including automatic conversion terms or mandatory repayment obligations. Security provisions may be necessary to protect the investor's position, and you should consider including information rights that allow investors to monitor company performance.

Legal requirements in United Arab Emirates

Under UAE Federal Law No. 8 of 2004 (Commercial Companies Law), your note must comply with corporate governance requirements, particularly regarding board resolutions authorizing the debt issuance and future equity conversion. The UAE Commercial Transactions Law (Federal Law No. 18 of 1993) governs the contractual aspects, including formation, validity, and enforcement mechanisms. Foreign investment restrictions under Federal Law No. 19 of 2018 may impact conversion terms if international investors are involved, requiring careful structuring to ensure compliance with foreign ownership limits. The Securities and Commodities Authority regulations may apply if the note is classified as a security, potentially triggering disclosure and registration requirements. Additionally, you must ensure the conversion mechanism aligns with your company's articles of association and that sufficient authorized share capital exists to accommodate the conversion without requiring shareholder approval for capital increases.