Convertible Note Purchase Agreement Template for Canada

A Convertible Note Purchase Agreement is a financing document that allows you to raise capital through debt instruments that can convert to equity shares. In Canada, these agreements serve as bridge financing for companies seeking to raise funds while deferring complex valuation negotiations until a future equity round.

When do you need this document?

You need this agreement when your company requires immediate funding but isn't ready for a full equity financing round. This commonly occurs during pre-seed or seed stages when establishing company valuation proves challenging or premature. The document is essential when investors want debt-like security with equity upside potential, or when you need to close funding quickly without extensive due diligence typical of equity rounds. Companies often use convertible notes to bridge funding gaps between major financing rounds or to raise initial capital from angel investors before institutional funding.

Key legal considerations

Your agreement must clearly define conversion triggers, including automatic conversion upon qualified financing events and optional conversion rights. Interest rate provisions must comply with federal Interest Act requirements and avoid exceeding the 60% criminal rate under the Criminal Code. You need specific clauses addressing maturity dates, repayment terms if conversion doesn't occur, and investor rights such as information access and participation rights in future rounds. The document should include comprehensive representations and warranties from both your company and investors, covering corporate authority, financial condition, and regulatory compliance. Anti-dilution protections, discount rates for conversion pricing, and caps on company valuation at conversion require careful drafting to balance investor protection with company flexibility.

Legal requirements in Canada

Your convertible note issuance must comply with provincial Securities Acts, which regulate securities offerings and may require prospectus filings unless specific exemptions apply. National Instrument 45-106 provides accredited investor and offering memorandum exemptions commonly used for convertible note financing. Under the Canada Business Corporations Act or relevant provincial corporations acts, your company needs proper corporate authorization through board and shareholder resolutions for note issuance. You must ensure compliance with foreign investment review under the Investment Canada Act if foreign investors participate. The agreement requires careful structuring to avoid characterization as equity for tax purposes while maintaining debt treatment. Provincial corporate law governs conversion mechanics, requiring proper share creation authority and compliance with stated capital rules upon conversion to equity.