Unsecured Convertible Promissory Note for South Africa

Unsecured Convertible Promissory Note Template for South Africa

An Unsecured Convertible Promissory Note is a hybrid financial instrument commonly used in South African business financing that combines elements of debt and equity. The document establishes the terms under which an investor loans money to a company, with the unique feature that the loan amount can be converted into equity shares under specified conditions. This agreement is governed by South African law and must comply with the Companies Act, National Credit Act, and other relevant legislation. It details the loan amount, interest rate, maturity date, conversion mechanisms, and provides investor protections while maintaining flexibility for both parties.

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What is a Unsecured Convertible Promissory Note?

The Unsecured Convertible Promissory Note is a strategic financing tool widely used in the South African market, particularly for emerging companies and startups seeking growth capital. This instrument offers flexibility by initially structuring investment as debt while providing the opportunity for conversion into equity, typically during future funding rounds or specific trigger events. The document is especially relevant when companies need to raise funds quickly without immediately setting a valuation, or when bridging between larger funding rounds. It must comply with South African legislation, including the Companies Act 71 of 2008 and the National Credit Act 34 of 2005, while addressing both debt service requirements and potential shareholding implications. The document includes essential provisions for interest calculations, repayment terms, conversion mechanics, and investor protections, making it suitable for both sophisticated investors and growing companies in the South African business landscape.

What sections should be included in a Unsecured Convertible Promissory Note?

1. Parties: Identification of the Issuer (borrower) and the Note Holder (lender)

2. Background: Context of the transaction, including the purpose of the loan and the parties' intention regarding potential conversion

3. Definitions and Interpretation: Key terms used in the note, including financial definitions, conversion-related terms, and interpretation rules

4. Principal Amount and Issuance: States the loan amount, issuance date, and confirmation of receipt of funds

5. Interest: Interest rate, calculation method, payment frequency, and default interest provisions

6. Repayment Terms: Maturity date, repayment schedule, early repayment provisions, and payment mechanics

7. Conversion Rights: Terms and conditions for converting the note into equity, including conversion price, timing, and mechanics

8. Conversion Mechanics: Detailed process for executing the conversion, including notices, timing, and documentation requirements

9. Representations and Warranties: Standard representations by both parties, including authority, capacity, and accuracy of information

10. Events of Default: Circumstances constituting default and consequences thereof

11. Remedies: Rights and remedies available to the Note Holder upon default

12. General Terms: Standard boilerplate provisions including notices, amendments, governing law, and jurisdiction

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

1. Security: While primarily unsecured, this section can include negative pledge provisions or subsequent security arrangements

2. Subordination: Required if the note needs to be subordinated to other debt

3. Transferability: Restrictions or conditions on the transfer of the note to third parties

4. Multiple Note Holders: Provisions for managing multiple note holders, including voting rights and majority decisions

5. Anti-dilution Protection: Protections for the note holder against dilution of conversion rights

6. Information Rights: Rights of the note holder to receive financial and other information from the issuer

7. Board Observer Rights: Rights of the note holder to appoint an observer to the issuer's board

8. Most Favored Nation: Provisions ensuring the note holder receives the benefit of any better terms granted to future note holders

What schedules should be included in a Unsecured Convertible Promissory Note?

1. Interest Calculation Examples: Detailed examples showing how interest is calculated under various scenarios

2. Conversion Calculations: Examples and formulas for calculating the number of shares to be issued upon conversion

3. Form of Conversion Notice: Template notice to be used by the note holder when exercising conversion rights

4. Corporate Information: Details of the issuer's share capital, shareholders, and corporate structure

5. Required Regulatory Approvals: List of any regulatory approvals needed for conversion

6. Excluded Events: List of corporate events that do not trigger conversion rights or adjustments

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

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Promissory Note Form

A South African law-compliant financial instrument containing a written promise to pay a specified sum of money, governed by the Bills of Exchange Act.

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What is a Unsecured Convertible Promissory Note?

What sections should be included in a Unsecured Convertible Promissory Note?

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

What schedules should be included in a Unsecured Convertible Promissory Note?

Authors

Alex Denne

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