Question 1

What is a Convertible Promissory Note Purchase Agreement

Accepted Answer

The Convertible Promissory Note Purchase Agreement is commonly used in Hong Kong's startup and growth company ecosystem as a bridge financing instrument. It's particularly useful when companies need immediate funding but determining a firm valuation is challenging or premature. This document type, governed by Hong Kong law, provides a framework for investors to lend money to a company with the right to convert the debt into equity, typically during a future financing round or upon specific trigger events. The agreement includes essential terms such as the investment amount, interest rate, maturity date, conversion discount, valuation cap, and investor protections. It offers advantages for both parties: companies can defer valuation discussions while receiving immediate funding, and investors can potentially benefit from a discount on the future equity price while having the security of debt in the interim.

Question 2

What sections should be included in a Convertible Promissory Note Purchase Agreement

Accepted Answer

1. Parties: Identification of the Company (Issuer) and the Purchaser(s). 2. Background: Context of the agreement, including the company's intention to issue convertible promissory notes and the purchaser's intention to invest. 3. Definitions and Interpretation: Key terms used throughout the agreement and rules of interpretation. 4. Purchase and Sale of Notes: Core terms of the purchase including purchase price, closing conditions and mechanics. 5. The Notes: Key terms of the notes including principal amount, interest rate, maturity date and payment terms. 6. Conversion Rights: Terms and conditions for converting the notes into equity, including conversion price, mechanisms and procedures. 7. Representations and Warranties of the Company: Company's statements about its legal status, authority, and business condition. 8. Representations and Warranties of the Purchaser: Purchaser's statements about their investment capacity and sophistication. 9. Covenants: Ongoing obligations of the company during the term of the notes. 10. Events of Default: Circumstances constituting default and consequences. 11. Miscellaneous: Standard legal provisions including notices, amendments, governing law, etc.

Question 3

What sections are optional to include in a Convertible Promissory Note Purchase Agreement

Accepted Answer

1. Security: Required if the notes are to be secured by specific assets or guarantees. 2. Subordination: Needed if the notes are to be subordinated to other debt. 3. Collective Action Provisions: Required for multiple purchasers to govern how they act together. 4. Pre-emptive Rights: Optional provisions giving noteholders rights in future financing rounds. 5. Information Rights: Additional information rights for noteholders beyond standard covenants. 6. Board Observer Rights: If noteholders are to be granted board observation rights. 7. Registration Rights: Relevant if converted shares may need to be registered for public trading. 8. Most Favored Nation Provision: Optional protection if company issues notes on better terms in the future.

Question 4

What schedules should be included in a Convertible Promissory Note Purchase Agreement

Accepted Answer

1. Form of Convertible Promissory Note: The actual form of note to be issued. 2. Disclosure Schedule: Exceptions to company representations and warranties. 3. Capitalization Table: Current and pro-forma capitalization of the company. 4. Use of Proceeds: Detailed breakdown of how the investment will be used. 5. Key Terms of Conversion: Detailed mechanics and calculations for conversion scenarios. 6. Required Consents and Filings: List of third-party consents and regulatory filings required. 7. Existing Indebtedness: Schedule of company's existing debt obligations. 8. Subscription Instructions: Technical details for completing the investment.

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What is a Convertible Promissory Note Purchase Agreement?

What sections should be included in a Convertible Promissory Note Purchase Agreement?

What sections are optional to include in a Convertible Promissory Note Purchase Agreement?

What schedules should be included in a Convertible Promissory Note Purchase Agreement?

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