The Convertible Note Contract is a vital financing instrument in Hong Kong's startup ecosystem, commonly used for seed or bridge funding rounds where company valuation might be premature or uncertain. This document type emerged as a practical solution for early-stage investments, offering the security of debt with the upside potential of equity. The agreement must comply with Hong Kong's legal framework, particularly the Companies Ordinance (Cap. 622) and Securities and Futures Ordinance (Cap. 571), while addressing both debt and equity aspects of the investment. It typically includes detailed provisions for conversion triggers, such as qualified financing rounds, company sale, or maturity, along with investor protections and information rights. The document's structure reflects Hong Kong's common law tradition while incorporating international best practices in venture financing.
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1. Parties: Identification of the issuing company and the note holder(s)
2. Background: Context of the convertible note issuance and the parties' intentions
3. Definitions and Interpretation: Key terms used throughout the agreement, including financial and technical definitions
4. Subscription and Issue: Terms of the note subscription, including principal amount, closing conditions, and mechanics
5. Interest: Interest rate, calculation method, payment schedule, and default interest provisions
6. Conversion Rights: Terms and conditions for converting the note into equity, including conversion price and mechanics
7. Conversion Price Adjustments: Mechanisms for adjusting conversion price based on corporate actions or anti-dilution provisions
8. Maturity and Repayment: Maturity date, repayment terms, and early repayment provisions
9. Company Covenants: Ongoing obligations of the company, including information rights and operational restrictions
10. Events of Default: Circumstances constituting default and consequences thereof
11. Transferability: Terms governing the transfer of the note to other parties
12. Notices: Process for formal communications between parties
13. General Provisions: Standard boilerplate clauses including governing law, jurisdiction, and amendments
1. Security: Include when the note is secured by company assets
2. Subordination: Include when the note needs to be subordinated to other company debt
3. Board Observer Rights: Include when investor is granted board observation rights
4. Most Favored Nation: Include to protect against better terms being offered to future note holders
5. Tag-Along Rights: Include when note holders are granted tag-along rights pre-conversion
6. Information Rights: Include when specific reporting requirements beyond standard covenants are needed
7. Pre-emptive Rights: Include when note holders are granted rights to participate in future funding rounds
1. Form of Conversion Notice: Standard form for exercising conversion rights
2. Conversion Mechanics: Detailed procedures and calculations for conversion process
3. Anti-dilution Provisions: Detailed mechanisms for price protection and share adjustments
4. Capitalization Table: Current and post-conversion capital structure of the company
5. Required Corporate Approvals: List of corporate and regulatory approvals needed for note issuance and conversion
6. Form of Legal Opinion: Template for legal opinion required at closing
7. Disclosure Schedule: Company disclosures and exceptions to representations
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