The Convertible Debt Agreement is a crucial financing instrument used in Saudi Arabia when companies, particularly growth-stage businesses, seek funding while deferring equity valuation. This document is typically employed when a company needs immediate financing but parties cannot agree on a current valuation, or when they want to postpone the valuation discussion until a future funding round. The agreement must be structured to comply with Saudi Arabian law and Shariah principles, particularly regarding the profit mechanism that replaces conventional interest. It includes detailed provisions for conversion triggers, usually tied to future equity rounds, company sale, or specific milestones. The document addresses key aspects such as conversion price mechanisms, investor protections, and compliance with both the Saudi Companies Law and Capital Market Authority regulations. This type of agreement has become increasingly important in the Saudi startup ecosystem, especially following recent reforms encouraging private sector investment and entrepreneurship.
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1. Parties: Identification of the Lender(s) and the Company, including registration details
2. Background: Context of the agreement, including company status and purpose of the financing
3. Definitions: Key terms used throughout the agreement, including financial and technical terms
4. Subscription and Issuance: Terms of the debt issuance, including amount and issuance date
5. Profit Rate and Payment: Shariah-compliant profit structure and payment terms (avoiding conventional interest)
6. Conversion Rights: Terms and conditions for converting the debt into equity, including conversion price and ratio
7. Conversion Mechanics: Detailed process for executing the conversion, including notices and documentation
8. Conversion Triggers: Events that trigger automatic or optional conversion rights
9. Representations and Warranties: Statements of fact by both parties, including Shariah compliance declarations
10. Company Covenants: Ongoing obligations of the company during the term of the agreement
11. Events of Default: Circumstances constituting default and consequences
12. Termination: Conditions and process for early termination
13. Governing Law and Jurisdiction: Specification of Saudi law and competent courts
1. Foreign Investment Provisions: Required when the lender is non-Saudi, addressing foreign investment regulations
2. Security: Optional provisions for securing the debt against company assets
3. Tag-Along Rights: Optional protection for the lender in case of company sale
4. Board Observer Rights: Optional rights for lender to appoint board observer pre-conversion
5. Information Rights: Optional provisions for regular financial reporting to lender
6. Anti-dilution Protection: Optional provisions protecting conversion rights from dilution
7. Shariah Board Approval: Required when parties need explicit Shariah compliance certification
1. Schedule 1: Conversion Notice: Form of notice for exercising conversion rights
2. Schedule 2: Capitalization Table: Current and post-conversion capital structure of the company
3. Schedule 3: Financial Statements: Latest financial statements of the company
4. Schedule 4: Calculation of Conversion Price: Detailed methodology for calculating conversion price
5. Schedule 5: Corporate Authorizations: Required corporate approvals and resolutions
6. Schedule 6: Shariah Compliance Certificate: If required, certification of Shariah compliance
7. Schedule 7: Disclosure Schedule: Exceptions to representations and warranties
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