Convertible Note Agreement
The Agreement Between a Company and a Consultant that Grants the Consultant a Note and the Right to Convert the Note into Future Equity
What it is: This agreement template is one of the various forms of Sweat Equity that is built into our app. It is incorporated into the Sweat Equity Agreement and a specific SOW that calls for all or part of the compensation for a specific deliverable by a Consultant to be compensated in the form of a Convertible Note. A convertible note documents the negotiated value of the Consultant's contributed effort that is owed to them by the Company unless it is converted into the same equity that the investor gets in a future venture capital investment round.
How it is used:
A Company should use a Convertible Note to compensate a Consultant for work deliverables when the goal is to delay the payment of cash compensation while giving the Consultant the opportunity to convert the Note to equity upon a venture capital investment (typically a sign of success and the ability to launch) that triggers the conversion of the Convertible Note into equity in the Company. (Be sure to seek competent legal and tax advice when choosing amount the various forms of Sweat Equity to avoid any negative consequences)
Our app will walk you through the step-by-step process of filling in all blocks of information, along with all of the necessary tips, instructions, and examples
This agreement form will typically only take a couple of minutes to complete if you have the necessary inputs at hand
Once you've completed the form, you can download and send it to your attorney and/or tax advisor to review and/or sign online and send it to the Consultant to review and sign
All completed forms for all Sweat Equity Consultants that you complete are logged in your subscriber dashboard
Complete one overall Sweat Equity Agreement for each Consultant
Complete a separate Statement of Work (SOW) for each phase of work
Issue the Sweat Equity upon acceptance of the deliverables
Compare this table with the other forms of Sweat Equity on our Sweat Equity 101 page.
Degree of Flexibility
Very flexible – can issue multiple Convertible Notes over the life of the Company
Potential Tax Consequences
Taxable at personal income tax rates upon issuance (this can be a huge negative surprise to a Consultant that only received a Convertible Note and no cash to pay the cost of the tax implications), plus Capital Gains tax upon an exit
Type of Upside
Basis of Sweat Equity Value
Converts to the same equity as venture capital investors, typically Series A Preferred equity, which has more preferences than the founder’s common equity
Overall value of the company
Realizing the Value of Sweat Equity
Only upon an exit
Current Valuation of the Company
No valuation is required
Has downside protection in the form of debt that the Company repays the Consultant if the Company doesn’t raise the venture capital (but the ability of the Company to pay the Consultant if it fails is unlikely). The downside protection for the Company if the Consultant fails to deliver is through the process of only issuing small amount of value via the Convertible Note for small projects
What it contains: Our Convertible Note template is a 5-page agreement that is incorporated into the overall Sweat Equity Agreement and SOW and includes the following items:
Principal and Interest - this template contains the specific language for how the amount of the Note (the value of the Consultant's time contribution) will be repaid and the applicable interest rate on the Note.
Conversion Rights - the Convertible Note agreement also contains the specific language for how the amount of the Note and Interest is converted into a qualifying venture capital investment round (including the minimum raise amount that triggers the conversion and the additional equity issued to pay off the interest). The Note provides the Consultant at conversion with the same securities as the venture capital investor.
General Provisions - the agreement form includes other required details regarding default provisions and transferability.
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