Convertible Agreement Regarding Equity Template for the United States

A Convertible Agreement Regarding Equity (CARE) serves as a crucial financing tool for early-stage companies seeking investment without the complexity of immediate equity valuation. This legal instrument allows you to raise capital while deferring the determination of your company's exact worth until a future qualifying financing round, making it an attractive option for seed-stage fundraising.

When do you need this document?

You'll need a CARE when your startup requires capital but determining a fair valuation proves challenging or premature. This situation commonly arises during pre-revenue stages, when launching a minimum viable product, or when seeking bridge financing between major funding rounds. The agreement is particularly valuable when you want to close investment quickly without lengthy valuation negotiations that could delay critical business operations. Additionally, if you're planning multiple small investments from various angels or seed investors before pursuing a Series A round, a CARE provides consistency and simplicity across all transactions.

Key legal considerations

The conversion mechanism represents the most critical aspect of your CARE, typically triggered by qualifying financing events, acquisition, or specific time periods. You must carefully structure the conversion price formula, often incorporating a valuation cap that protects investor interests while preserving your ability to raise future rounds at higher valuations. Discount rates provide additional investor protection by offering shares at reduced prices compared to future investors. Your agreement should clearly define qualifying financing thresholds, conversion rights upon company sale, and treatment of accrued interest or dividends. Consider anti-dilution provisions, voting rights of converted shares, and information rights granted to investors. Pay special attention to representations and warranties sections, as these create legal obligations regarding your company's financial condition, legal standing, and business operations.

Legal requirements in United States

Federal securities laws significantly impact your CARE structure, particularly the Securities Act of 1933, which requires either registration of securities offerings or qualification for specific exemptions. Most CARE transactions rely on Regulation D exemptions, commonly Rule 506(b) or 506(c), which impose restrictions on investor solicitation and qualification requirements. You must ensure all investors meet accredited investor standards under federal definitions, maintaining proper documentation of their qualification status. State blue sky laws add additional compliance layers, with registration or exemption requirements varying by jurisdiction where you offer or sell the securities. Delaware General Corporation Law governs most startup CAREs due to Delaware's business-friendly corporate framework, though you must comply with laws of your state of incorporation. The JOBS Act provisions may provide additional flexibility for smaller offerings, particularly regarding general solicitation and crowdfunding opportunities. Proper disclosure documents, investor questionnaires, and compliance with holding period requirements ensure regulatory adherence throughout the investment process.