Unsecured Convertible Promissory Note Template for Australia

An Unsecured Convertible Promissory Note is a sophisticated financing instrument that combines elements of both debt and equity, allowing your company to raise capital while providing investors with the option to convert their loan into shares. This document serves as a legal agreement where you promise to repay borrowed funds with interest, while granting the investor conversion rights under specific circumstances such as a qualified financing round or at maturity.

When do you need this document?

You'll typically use this document when your company requires immediate capital but isn't ready for a full equity round. Startups often rely on convertible notes during pre-seed or seed stages when valuation discussions are premature or when bridging between funding rounds. This instrument is also valuable when you need to close investment quickly without the extensive due diligence and documentation required for equity transactions. Early-stage technology companies, in particular, find convertible notes useful for raising capital from angel investors or venture capital firms who want to defer valuation negotiations until a later, more substantial funding round.

Key legal considerations

Several critical elements require careful attention when drafting your convertible note. The conversion mechanism must be clearly defined, including conversion triggers such as qualified financing events, automatic conversion at maturity, or optional conversion rights. Interest rates and payment terms need specification, as does the discount rate or valuation cap that may apply upon conversion. You must also address what happens if no qualifying event occurs before maturity, whether through mandatory conversion, repayment, or extension options. Security and subordination provisions should be considered, even though the note is unsecured, as they affect investor rights in liquidation scenarios. Additionally, include provisions for information rights, board representation, and anti-dilution protections that may apply post-conversion.

Legal requirements in Australia

Under Australian law, your convertible note must comply with the Corporations Act 2001 (Cth), particularly regarding the issuance of securities and disclosure obligations. If the note converts to shares, you must ensure compliance with share issuance procedures and shareholder approval requirements where applicable. ASIC regulations may require disclosure documents or exemptions, especially if offering to retail investors rather than sophisticated or professional investors. The Income Tax Assessment Act 1997 (Cth) implications for both interest payments and conversion events should be considered for tax planning purposes. While the note is unsecured, understanding the Personal Property Securities Act 2009 (Cth) framework remains important for comprehensive security arrangements. Additionally, if your investors could be classified as retail clients, the National Consumer Credit Protection Act 2009 (Cth) may impose additional obligations on your lending arrangements.