Unsecured Convertible Promissory Note Template for Canada

An Unsecured Convertible Promissory Note is a sophisticated financial instrument that combines traditional debt financing with the potential for equity conversion. You'll use this document when your company needs bridge financing between funding rounds or when seeking flexible investment terms that appeal to both debt-conscious and equity-seeking investors.

When do you need this document?

You'll typically need this note when your startup requires immediate capital but isn't ready for a full equity round. Common scenarios include funding product development, hiring key personnel, or bridging cash flow gaps before Series A financing. The convertible feature makes it attractive to investors who want downside protection through debt terms while maintaining upside potential through equity conversion. Early-stage companies often use these notes to avoid complex valuation negotiations during uncertain periods.

Key legal considerations

Several critical elements require careful attention in your convertible note. The conversion mechanism must clearly define triggers, such as qualified financing events or maturity dates, along with conversion prices and any applicable discounts or valuation caps. Interest rate provisions must comply with Criminal Code Section 347's maximum rates to avoid criminal interest violations. You must also consider the ranking of this debt relative to other company obligations and any default provisions. The note should address what happens if conversion events don't occur by maturity, including automatic conversion clauses or repayment terms. Additionally, you'll need to ensure proper corporate authorization through board resolutions and consider any existing shareholder agreements that might affect conversion rights.

Legal requirements in Canada

Your convertible note must comply with multiple layers of Canadian law. The Canada Interest Act requires specific disclosure of interest rates and calculation methods, particularly for rates exceeding 60% annually. Under the Criminal Code, you cannot charge interest exceeding 60% per annum on the effective annual basis. Provincial Securities Acts govern the issuance of convertible instruments, with requirements varying by province but generally including investor suitability assessments and potential prospectus exemptions. The Canada Business Corporations Act or applicable Provincial Business Corporations Act will govern the share issuance upon conversion, requiring proper corporate resolutions and share certificate procedures. You must also consider whether the note constitutes a security requiring regulatory compliance, including potential filing requirements and investor disclosure obligations. Professional legal counsel should review your note to ensure full regulatory compliance across all applicable jurisdictions.