The Equity Promissory Note is commonly used in German startup and growth company financing as a bridge financing instrument or an alternative to straight equity investment. It offers investors the security of debt with the upside potential of equity participation. This document type is particularly suitable for companies seeking interim financing before a larger funding round or those wanting to defer equity valuation discussions. The Equity Promissory Note must comply with German civil law requirements for promissory notes (Schuldschein) while incorporating specific provisions for equity conversion under German corporate law. It typically includes detailed terms regarding interest, maturity, conversion rights, and investor protections, all structured within the framework of German commercial and securities regulations.
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1. Parties: Identification of the issuer (promisor) and the noteholder (promisee)
2. Background: Context of the issuance, including the relationship between parties and purpose of the note
3. Definitions: Key terms used throughout the document, including financial terms and conversion-related definitions
4. Promise to Pay: Core provision establishing the debt obligation, principal amount, and payment terms
5. Interest: Interest rate, calculation method, and payment schedule
6. Conversion Rights: Terms and conditions for converting the note into equity, including conversion price and mechanism
7. Maturity and Repayment: Maturity date and repayment terms, including any early repayment provisions
8. Events of Default: Circumstances constituting default and consequences thereof
9. Representations and Warranties: Basic statements of fact and assurances from the issuer
10. Information Rights: Noteholder's rights to receive company information and financial statements
11. Assignment and Transfer: Terms governing transfer of the note to third parties
12. Notices: Communication requirements and contact details
13. Governing Law and Jurisdiction: Specification of German law application and jurisdiction
1. Security: Include when the note is secured by specific assets or guarantees
2. Subordination: Include when the note needs to be subordinated to other debt
3. Tax Provisions: Include when specific tax treatment or withholding requirements apply
4. Anti-dilution Protection: Include when additional protection against equity dilution is needed
5. Board Observer Rights: Include when noteholder is granted rights to observe board meetings
6. Pre-emptive Rights: Include when noteholder is granted rights to participate in future financing rounds
7. Most Favored Nation: Include when noteholder should benefit from better terms given to future investors
1. Conversion Mechanics: Detailed procedures and calculations for conversion process
2. Form of Conversion Notice: Template notice for exercising conversion rights
3. Cap Table: Current and post-conversion capitalization table
4. Corporate Documents: Relevant corporate resolutions and authorizations
5. Payment Schedule: Detailed schedule of interest payments and principal repayment
6. Calculation Examples: Examples of interest and conversion calculations
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