Unsecured Convertible Promissory Note Template for Saudi Arabia

An Unsecured Convertible Promissory Note is a sophisticated financing instrument that combines the characteristics of debt and equity, allowing you to raise capital while deferring complex valuation discussions. In Saudi Arabia, this document must comply with multiple regulatory frameworks, including the Commercial Courts Law and Capital Market Law, while adhering to Shariah principles that govern financial transactions.

When do you need this document?

You'll need this document when your company requires immediate funding but wants to postpone equity valuation negotiations until a future financing round. This is particularly common in bridge financing scenarios where you're raising capital between major funding rounds. Startups often use convertible notes during pre-Series A rounds, allowing early investors to participate without establishing a firm company valuation. Growing companies also utilize these instruments when seeking working capital or funding for specific projects while maintaining flexibility in their capital structure. Foreign investors entering the Saudi market frequently prefer this structure as it provides debt-like security with equity upside potential, subject to Foreign Investment Law restrictions.

Key legal considerations

The conversion mechanism is the most critical component of your note, requiring precise definition of conversion triggers, such as qualified financing events or maturity dates. You must clearly specify the conversion terms, including any discount rates or valuation caps that benefit note holders. The profit rate structure must comply with Shariah principles, typically using profit-sharing arrangements rather than fixed interest rates. Default provisions need careful drafting to balance investor protection with company flexibility, particularly regarding acceleration clauses and remedy procedures. Security arrangements, while the note is unsecured, should address potential future collateral requirements. Corporate governance provisions may require board representation or information rights for significant note holders, especially when conversion could result in substantial equity stakes.

Legal requirements in Saudi Arabia

Your convertible note must comply with the Capital Market Law, which regulates securities and their issuance, requiring proper disclosure to investors and potential registration with the Capital Market Authority for larger offerings. The Commercial Courts Law provides the enforcement framework, establishing procedures for debt recovery and dispute resolution. Companies Law governs the conversion process, particularly regarding share issuance procedures, board resolutions, and shareholder approval requirements. Banking Control Law may apply if your company is in the financial services sector or if the note structure resembles regulated banking products. Foreign Investment Law restrictions apply when overseas investors are involved, potentially limiting ownership percentages or requiring special approvals. Shariah compliance is essential, requiring review by qualified Shariah advisors to ensure the profit-sharing structure and conversion terms align with Islamic finance principles. Documentation must be prepared in Arabic for official purposes, though English versions are commonly used in international transactions.