Convertible Note Term Sheet

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I. Overview

This Convertible Note Term Sheet (“Term Sheet”) outlines the principal terms and conditions proposed for the convertible note offering by [Your Company Name]. The goal of this Term Sheet is to provide a preliminary framework as a precursor to a definitive agreement. It is intended to serve as a guide for further negotiation and due diligence.

The convertible note is a debt instrument that automatically converts into equity, typically preferred shares, either at the next funding round (automatic conversion) or at the maturity date if not earlier converted (optional conversion), under the terms specified herein.

II. Key Terms of the Convertible Note

• Issuer: [Your Company Name] is a legally constituted corporation that has been organized and is in existing compliance with the statutes and regulations of [Your State/Country].

• Investor: [Investor Name], it will be necessary to engage in further discussions to elaborate and set forth additional terms and conditions in detail, which will then be incorporated within the framework of future agreements.

A. Principal Amount

• Total Offering Amount: $[Amount]

• Minimum Subscription: The minimum amount of subscription that each investor is required to contribute.

B. Interest Rate

The Principal Amount shall accrue interest at an annual rate of [X%]. Interest will be payable at the time of conversion of the note into equity or at the repayment of the note, whichever occurs first.

C. Maturity Date

The maturity date of this Convertible Note is scheduled to be [Date]. However, this date may be subject to extension if there is a mutual agreement between the involved parties to do so, or if the conditions specified for conversion of this note are triggered.

D. Conversion Details

• Conversion Trigger: Conversion into a specific type of shares, usually preferred stock, will occur when there is an equity financing event amounting to at least a specified amount in dollars.

• Conversion Price: The lesser value of either (i) the per share price paid by the new investors, which is then adjusted by multiplying it by (1 minus the discount rate expressed as a percentage, specifically [Discount Rate]%); or (ii) a price that is determined based on a pre-money valuation cap set at $[Valuation Cap].

• Optional Conversion: The option to convert is available to the holder at their discretion, and this can be exercised on the Maturity Date, precisely at the stipulated Conversion Price.

E. Discounts and Valuation Caps

Discounts are applied to provide early investors with a lower price per share compared to the price per share issued during a subsequent financing round. The Valuation Cap is the maximum valuation at which your notes will convert into equity, protecting investors from over-dilution.

III. Representations and Warranties

Both the issuer and the investors will make standard representations and warranties typical for transactions of this nature. These will cover legality, authorization, enforcement, compliance with laws, and accuracy of disclosed information.

IV. Covenants and Conditions

The issuer will agree to certain covenants regarding the use of proceeds, rights to future financings, information rights, and other investor protections. Specific conditions to the closing of the financing will also be detailed, such as satisfactory completion of due diligence.

V. Governing Law

This Term Sheet, along with any subsequent agreements, shall be governed by and construed following the laws of [Jurisdiction]. Any disputes, controversies, or claims arising out of or concerning this agreement shall be exclusively settled through the judicial process by the courts located in [Jurisdiction City/State].

VI. Confidentiality

This Term Sheet is to be treated as confidential and is provided exclusively for your information. Under no circumstances is this document to be copied, reproduced, or shared with any third parties without securing prior written approval from [Your Company Name].

VII. Acceptance

Kindly confirm your acceptance of the conditions specified in this Term Sheet by signing and sending back a copy by [Deadline Date]. Please be aware that while the document is generally non-binding, the provisions concerning exclusivity, confidentiality, and governing law are legally enforceable.

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