Convertible Promissory Note Template for New Zealand

A convertible promissory note is a versatile financing instrument that combines features of both debt and equity, making it an essential tool for New Zealand startups and growth companies. You'll use this document when you need to raise capital quickly while postponing the complex process of determining your company's exact valuation. The note functions as a loan that can convert into equity shares under specific circumstances, typically when your company raises its next significant funding round.

When do you need this document?

You'll need a convertible promissory note when your company requires immediate funding but determining a fair valuation is challenging or premature. This commonly occurs during pre-seed or seed funding stages when your company may lack sufficient financial history for accurate valuation. The document is particularly valuable when you're negotiating with investors who want to support your company but prefer to defer equity discussions until a future financing round. You'll also use this instrument when you need bridge financing to reach specific milestones that will justify a higher valuation, or when you're preparing for a larger funding round but need immediate capital to continue operations.

Key legal considerations

When drafting your convertible promissory note, you must carefully structure the conversion mechanism, including the conversion price formula and any applicable discounts or valuation caps. The interest rate and maturity date require particular attention, as these terms affect both your cash flow obligations and investor returns. You should clearly define what constitutes a qualifying financing event that triggers conversion, typically based on minimum funding amounts and investor types. The document must include appropriate default provisions and specify remedies available to investors if conversion conditions aren't met. You'll also need to address what happens at maturity if no qualifying financing occurs, including options for repayment, extension, or conversion at a predetermined valuation.

Legal requirements in New Zealand

Your convertible promissory note must comply with the Contract and Commercial Law Act 2017, which governs contract formation and enforcement in New Zealand. Under the Financial Markets Conduct Act 2013, you may need to consider whether the instrument constitutes a debt security requiring disclosure obligations, particularly if offered to retail investors. The Companies Act 1993 applies to the equity conversion aspects, including share issuance procedures and shareholder rights upon conversion. You must ensure compliance with the Fair Trading Act 1986 regarding disclosure of material information and avoid misleading conduct. The Financial Markets Authority oversees securities regulation, and you may need to assess whether your offering requires registration or qualifies for exemptions under the Financial Markets Conduct Regulations. Your document should also address tax implications under New Zealand tax law, particularly regarding interest deductibility and potential deemed dividends upon conversion.