The Equity Promissory Note is a hybrid financial instrument widely used in the Indian business environment, particularly in startup and growth-stage company funding scenarios. It provides companies with a flexible funding mechanism that initially operates as debt but can convert to equity under predetermined conditions. This document type is governed by multiple Indian laws including the Negotiable Instruments Act, Companies Act, and relevant securities regulations. The note typically includes essential elements such as principal amount, interest rate, maturity date, conversion price, and trigger events for conversion. It's particularly useful when companies need bridge financing with the potential for equity participation, offering investors the security of debt with the upside potential of equity. The document must comply with Indian statutory requirements while balancing the commercial interests of both the issuing company and the investor.
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1. Parties: Identification of the maker (issuer) and the payee of the promissory note
2. Background: Context of the transaction and relationship between the parties
3. Definitions: Key terms used throughout the document, including financial terms and conversion-related definitions
4. Promise to Pay: Unconditional promise to pay a specific sum, including the principal amount and interest terms
5. Payment Terms: Details of payment schedule, interest calculations, and payment mechanics
6. Equity Conversion Right: Terms and conditions under which the note can be converted into equity shares
7. Conversion Mechanics: Detailed process for executing the conversion, including timing, notice requirements, and share calculation method
8. Representations and Warranties: Standard declarations by the issuer regarding authority, validity, and compliance
9. Events of Default: Circumstances that trigger default and consequences thereof
10. Governing Law and Jurisdiction: Specification of Indian law as governing law and jurisdiction for disputes
1. Security: Include when the note is secured by specific assets or guarantees
2. Foreign Investment Compliance: Required when the payee is a non-resident entity, ensuring FEMA compliance
3. Tag-Along Rights: Optional protection for the note holder in case of share transfer by existing shareholders
4. Board Observer Rights: Rights of the note holder to attend board meetings, typically included for significant investments
5. Information Rights: Specific rights to receive company financial and operational information
6. Pre-emptive Rights: Rights of first refusal on future share issuances, included for strategic investors
1. Conversion Price Calculation: Detailed formula and examples for calculating the share conversion price
2. Form of Conversion Notice: Template notice to be used when exercising conversion rights
3. Company Share Capital Structure: Current capitalization table and post-conversion impact
4. Payment Schedule: Detailed amortization schedule if payments are structured
5. Form of Share Certificate: Template for share certificates to be issued upon conversion
6. Compliance Certificates: Templates for various compliance certificates required under Indian law
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