Free Startup Convertible Note Agreement

1. THE PARTIES

This Startup Convertible Note Agreement ("Agreement") is made on [Month Day, Year] (the "Effective Date") by and between [Your Company Name] (hereinafter referred to as "Company"), located at [Your Company Name] and [Second Party Name] (hereinafter referred to as "Investor"), located at [Second Party Address]. The parties hereinafter may also be referred to individually as "Party" and collectively as "Parties."

2. INVESTMENT AMOUNT AND TERMS

2.1 Principal Amount and Payment Terms

The Investor agrees to purchase from the Company a Convertible Note in the principal amount of $500,000. This principal amount represents the initial investment made by the Investor. The Convertible Note will be purchased in a cash amount equal to the principal amount, and payment shall be made within 30 days of the Effective Date.

2.2 Interest Accrual

The Convertible Note will accrue interest at a fixed rate of 5% per annum. Interest will begin accruing from the Effective Date and will be calculated based on the outstanding principal amount. The interest will be due and payable upon the occurrence of the conversion event or at the maturity date, which is set at 24 months from the Effective Date.

2.3 Conversion Terms

Upon the occurrence of the qualified financing event as stated in this Agreement, the principal amount of the Convertible Note, along with any accrued and unpaid interest, shall be automatically converted into equity securities of the Company. The conversion terms include a 20% discount rate and a valuation cap of $5 million, subject to negotiation between the Company and the Investor.

2.4 Maturity Date

While conversion is the primary expectation, the Convertible Note has a maturity date. If a qualified financing round doesn't occur by this date, the Company may be required to repay the principal amount with any accrued interest. The maturity date is set at 24 months from the Effective Date.

2.5 Additional Investment Terms

In addition to the initial investment, the Investor has the option to participate in subsequent funding rounds up to a total investment of $1 million. The terms of such participation, including any pre-emption rights or anti-dilution provisions, will be mutually agreed upon between the Company and the Investor.

3. CONVERSION OF NOTE

3.1 Automatic Conversion

The principal amount of the Convertible Note, along with any accrued and unpaid interest, shall be automatically converted into equity securities of the Company upon the occurrence of the qualified financing event as stated in this Agreement. This automatic conversion simplifies the process and ensures a seamless transition from debt to equity.

3.2 Conversion Terms

The conversion terms are critical components of this Agreement:

3.2.1 Conversion Price

The conversion price is set at $1.50 per share.

3.2.2 Discount Rate

The Investor is entitled to a 15% discount rate when converting the Convertible Note into equity.

3.2.3 Valuation Cap

A valuation cap of $8 million is applied to protect the Investor's interest, ensuring a maximum valuation for conversion.

3.3 Dilution Protection

In the event of subsequent financing rounds that result in dilution for existing shareholders, the Investor is entitled to anti-dilution protection. This protection ensures that the Investor's ownership percentage is preserved by adjusting the conversion terms in favor of the Investor.

3.3.1 Full Ratchet

The Full Ratchet anti-dilution provision is in place, providing the Investor with full protection against dilution by adjusting the conversion price downward to the price of the new issuance.

3.4 Conversion Mechanics

To facilitate a smooth conversion process:

3.4.1 Documentation

The Company agrees to provide all necessary documentation related to the conversion promptly.

3.4.2 Notifications

The Company will notify the Investor in writing within 10 days of the qualified financing event, triggering the automatic conversion.

3.4.3 Timeline

The conversion process, including the issuance of equity securities, shall be completed within 30 days from the qualified financing event.

3.5 Alternative Conversion Events

In addition to the qualified financing event, alternative conversion events are defined:

3.5.1 Acquisition

If the Company undergoes an acquisition, the Convertible Note shall be converted into equity based on the acquisition terms.

3.5.2 Initial Public Offering (IPO)

In the event of an IPO, the Convertible Note shall be converted into equity based on the IPO valuation.

4. REPRESENTATIONS AND WARRANTIES

4.1 Company Representations and Warranties

The Company makes the following representations and warranties to the Investor:

4.1.1 Corporate Existence

The Company is a duly organized and validly existing entity under the laws of [State Name].

4.1.2 Authorization

The execution, delivery, and performance of this Agreement have been duly authorized by all necessary corporate action.

4.1.3 Enforceability

This Agreement constitutes a legal, valid, and binding obligation of the Company, enforceable against the Company in accordance with its terms.

4.1.4 Compliance with Laws

The Company is in compliance with all applicable laws, regulations, and permits required for its business operations.

4.1.5 Intellectual Property

The Company owns or has valid licenses for all intellectual property rights necessary for its business operations and products.

4.2 Investor Representations and Warranties

The Investor makes the following representations and warranties to the Company:

4.2.1 Accredited Investor

The Investor is an accredited investor as defined by the Securities and Exchange Commission (SEC).

4.2.2 Investment Experience

The Investor has sufficient knowledge and experience in financial and business matters to evaluate the risks and merits of the investment.

4.2.3 Risk Acknowledgment

The Investor acknowledges the speculative nature of the investment and is aware of the risks associated with investing in early-stage startups.

4.2.4 Compliance with Laws

The Investor is in compliance with all applicable laws and regulations related to the investment.

4.3 Indemnification

Both the Company and the Investor agree to indemnify and hold harmless each other from any losses, damages, or liabilities arising out of any breach of the representations and warranties made in this Agreement.

4.4 Due Diligence Period

A due diligence period of 30 days from the Effective Date is granted to the Investor to conduct any additional investigations and satisfy itself regarding the accuracy of the Company's representations and warranties.

4.5 Material Adverse Change

The Company agrees to notify the Investor promptly of any material adverse change in its financial condition or business operations that may affect the Investor's investment decision.

5. GOVERNING LAW

5.1 Jurisdiction

This Agreement shall be governed by and construed under the laws of [State Name]. Any legal actions or proceedings arising out of or relating to this Agreement shall be brought in the courts of [State Name].

5.2 Governing Law Principles

The laws of [State Name] will be applied without regard to its conflicts of law principles. The Parties agree that the choice of governing law is fair and reasonable, providing a stable legal framework for the interpretation and enforcement of this Agreement.

5.3 Exclusive Jurisdiction

The Parties agree to submit to the exclusive jurisdiction of the courts of [State Name] for any legal actions or proceedings arising out of or related to this Agreement. This exclusive jurisdiction provision ensures a clear legal venue for dispute resolution.

5.4 Governing Law Amendments

Any amendments to the governing law or jurisdiction provisions of this Agreement require the written consent of both Parties.

6. ENTIRE AGREEMENT

6.1 Integration Clause

This Agreement, including the recitals and any documents referred to herein, constitutes the entire agreement between the Parties. There are no other agreements, understandings, representations, or warranties between the Parties except as expressly set forth herein.

6.2 Modification and Waiver

No modification, amendment, or waiver of any provision of this Agreement shall be effective unless in writing and signed by both Parties. The failure of either Party to enforce any provision shall not constitute a waiver of that provision or any other provision of this Agreement.

6.3 Severability

If any provision of this Agreement is held invalid or unenforceable, the remaining provisions shall remain in full force and effect. The Parties agree to replace the invalid or unenforceable provision with a valid and enforceable provision that most closely aligns with the intent of the original provision.

6.4 Assignment

Neither Party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other Party. Any purported assignment in violation of this section shall be void.

6.5 Successors and Assigns

This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns. Any references to a Party in this Agreement shall include its successors and assigns.

6.6 Counterparts

This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. Facsimile and electronic signatures shall be considered valid.

7. SIGNATURES

IN WITNESS WHEREOF, each party represents and warrants that it has read this Agreement in its entirety and fully understands, agrees, and consents to be bound by its terms.

[Your Name]
[Your Company Name]

Date: [Month Day Year]

[Second Party Name]

Date: [Month Day Year]

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