[ ] LIMITED CONVERTIBLE NOTE AGREEMENT
DATED [ ] 2016
By and Between:
[ ] LIMITED a company incorporated in England and Wales with registration number [insert company number] and whose registered office is at [ ] (the “Company”) and
[______] (the “Lender”).
INTRODUCTION
The Lender has made available to the Company an unsecured loan in the amount of £[ ] (the “Loan”) on the terms outlined below in this Convertible Note Agreement (the “Note”). The Loan is being made to the Company for working capital purposes. [The Company may issue additional loans aggregating up to £[ ] (the “Additional Loans”) within [ ] days of the date of this Note on the same terms as this Note (together the Loan and the Additional Loan shall be the “Loans”). For the purposes of the Loans, “Lender Majority” shall mean the holders of the Loans holding more than 50% of the outstanding principal amount of the Loans.]
1. [Interest. The Loan bear interest at the rate of [ ] % per annum, Interest shall be calculated on the basis of a 365-day year and shall accrue daily commencing on the date of issuance of the Note until payment in full of the principal sum, together with all accrued and unpaid interest and other amounts which may become due hereunder.][1]
2. [Term and Repayment. The Loan shall be repaid by the Company on [ ] ([ ] months from the date of this Note (the “Repayment Date”)[ (or such later date as may be agreed by the Company and the Lender/Lender Majority)], unless earlier converted as set forth below.][2]
3. Automatic Conversion. Upon the closing of a financing round (the “Qualified Financing Round Date”) in which the Company raises at least £[ ] (a “Qualified Financing Round”), the Loan plus accrued but unpaid interest shall immediately and automatically convert, without the need for any further action, into fully paid [Ordinary Shares] [securities of the type or types, with identical rights and preferences and with the same obligations as the securities issued in the Qualified Financing Round] at [the lower of (i)] a discount of 20% of the issue price per share in such Qualified Financing or (ii) a price per share based on a pre-money valuation of £[ ], rounded down to the nearest whole share.[3]
4. Optional Conversion. (a) Upon the closing of a financing round prior to the Repayment Date in which the Company raises less than £[ ] (a “Non-Qualified Financing Round”), the Lender shall have the option but not the obligation to convert the Loan plus accrued but unpaid interest into fully paid [Ordinary Shares] [securities of the type or types, with identical rights and preferences and with the same obligations as the securities issued in the Non-Qualified Financing Round] at [the lower of (i)] a discount of 20% of the issue price per share in such Non-Qualified Financing Round or (ii) a price per share based on a fully-diluted pre-money valuation of£[ ] , rounded down to the nearest whole share]. (b) If the Loan has not been otherwise converted prior to the Repayment Date, the Lender shall have the option but not the obligation to convert the Loan plus accrued but unpaid interest into fully paid [Seed Preferred] [Ordinary] Shares in the capital of the Company a price per share based on a fully-diluted pre-money valuation of £[ ], rounded down to the nearest whole share.[4]
5. Conversion on Exit. If there is a liquidation, sale of all or substantially all of the shares or assets of the Company or any other transaction in which control of the Company is transferred (each, an “Exit”) and the Loan has not been otherwise converted or repaid, [the Loan plus accrued but unpaid interest shall immediately and automatically convert, without the need for any further action] [the Lender shall have the option to convert the Loan plus accrued but unpaid interest] [into Ordinary Shares [or Seed Preferred Shares if in issue] in the capital of the Company at a lower of (a) a discount of 20% of the price per share paid by the acquirer in such Exit or (b) a price per share based on a fully-diluted pre-money valuation of £[ ] rounded down to the nearest whole share] [the Lender shall be entitled to receive an amount equal to [ ] times the Loan plus accrued but unpaid interest].[5]
6. Covenants of the Company. The Company covenants with the Lender as follows: (a) Upon conversion of the Loan, the Lender shall be supplied with such documentation as may be required to satisfy it that the Company has authority to allot the shares being issued to the Lender; (b) The Company shall at all times perform and comply in all material respects with its obligations set out in this Note and shall not take any steps or actions which impair or adversely affect or derogate from, in any manner whatsoever, the enforceability in any respect of this Note.
7. Prepayment. The Loan shall not be prepaid to the Lender, in whole or in part, without the prior written consent of the Lender.
8. Representations and Warranties. The Company hereby represents and warrants to the Lender that: (a) The Company is a company duly formed, validly existing and in good standing under the laws of England and Wales, with full corporate power and authority to enter into and perform its obligations under this Note; (b) the Company has full power and authority to consummate the transactions contemplated hereunder; (c) No consents, authorisations or approvals of any kind of any governmental authority or other third party are required in connection with the execution or performance of this Note by the Company; (d) The consummation of the transactions contemplated hereunder and the performance of this Note by the Company do not violate the provisions of the Articles of Association of the Company, or any applicable law, and will not result in any breach of, or constitute a default under, any Note or instrument to which the Company is a party or by which it is bound; (e) The execution and performance of this Note by the Company has been duly authorised by all necessary actions, and this Note has been duly executed and delivered by the Company; [(f) The Company owns or possesses or believes it can acquire on commercially reasonable terms sufficient legal rights to all patents, patent applications, trademarks, trademark applications, service marks, tradenames, copyrights, trade secrets, licenses, domain names, mask works, information and proprietary rights and processes as are necessary to the conduct of its business as now conducted and as presently proposed to be conducted without any known conflict with, or infringement of, the rights of others;] [(g) The Company has not received any communications alleging that the Company has violated or, by conducting its business, would violate any of the patents, trademarks, service marks, tradenames, copyrights, trade secrets, mask works or other proprietary rights or processes of any other person;] [(h) There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or threatened against the Company or any of its properties or any of its officers or managers (in their capacities as such);] [(i) There is no judgment or order against the Company, or, to the knowledge of the Company, any of its directors or managers (in their capacities as such), that could prevent, enjoin, or materially alter or delay any of the transactions contemplated by this Note, or that could reasonably be expected to have a material adverse effect on the Company;][6] (j) This Note is valid and binding upon the Company and enforceable in accordance with its terms.
9. Events of Default. The Loan shall be repaid by the Company on demand by the [Lender][Lender Majority] at any time after any one or more of the following events shall have occurred: (a) the Company stops payment of its debts generally or ceases or threatens to cease to carry on all or a substantial part of its business; (b) the Company is deemed, for the purposes of section 123 Insolvency Act 1986, to be unable to pay its debts or compounds or proposes or enters into any reorganisation or special arrangement with its creditors generally; (c) any petition is advertised by any person for the winding-up of the Company or an order is made or an effective resolution passed for the winding-up of the Company; or (d) an administration order is made in relation to the Company; (e) the Company fails to comply with any of the covenants, conditions or provisions contained in this Note or breaches any provisions hereof and which breach, if capable of cure, is not cured within [30][60][90][7] days; (f) or any representation or warranty contained herein proves to be incorrect in any material respect (each such event constituting an “Event of Default”). Upon becoming aware of an Event of Default, the Company will promptly notify the Lender of the same and of any action taken or proposed to be taken in connection with the same.
10. [Major Investor Rights. In the event that the Lender, together with its affiliates, provides a loan in the aggregate amount in excess of £[ ] pursuant to the terms of one or more Notes (a “Major Investor”), the Company shall provide the Major Investor with the following rights:
a. Information Rights. To the extent that the Company prepares financial statements, the Company shall deliver to the Major Investor such financial statements upon request, as soon as practicable, but in any event within thirty (30) days after the end of each of the first three (3) quarters of each financial year of the Company and within ninety (90) days after the end of each financial year of the Company. Such financial statements shall be in reasonable detail and prepared on a consistent basis. Additionally, regardless of whether the Company prepares financial statements, the Company shall deliver to the Major Investor such information relating to the financial condition, business or affairs of the Company as such Major Investor may from time to time reasonably request. Notwithstanding anything to the contrary in this Section 10(a), the Company shall not be obligated under this Section10(a) to provide information that (i) it deems in good faith to be a trade secret or highly confidential information or (ii) the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel; and the Major Investor agrees to maintain the confidentiality of all of the information provided to the Major Investor under this Section10(a) and agrees not to use such information other than for a purpose reasonably related to the Major Investor’s investment in the Company.
b. Participation Rights. Each time the Company proposes to offer any equity securities at any time prior to and including the closing of a Qualified Financing Round or a Non-Qualified Financing Round (any such offering referred to as a “Financing”) the Company shall provide the Major Investor with at least ten (10) business days prior written notice of such offering, including the price and terms thereof. The Major Investor shall have a pro rata right, but not an obligation, to participate in each such Financing, on the same terms and for the same price as all other investors in such Financing, by purchasing an aggregate number of equity securities (whether in one offering or across multiple offerings) valued at up to the participation amount of the Major Investor (which shall be the GBP equivalent of $[]). The Major Investor’s participation right as set forth in this Section 10(b) shall be subject to compliance with applicable securities laws.
c. “Major Investor” Rights. The Company shall ensure that the Major Investor shall be deemed to be a “Major Investor” (or such similar term) for all purposes, including, without limitation, rights of first offer and information rights, in relevant financing documents related to all subsequent Financings, to the extent such concept exists.][8]
11. [Most Favoured Nation. In the event the Company sells or issues any convertible instruments (other than the grant of options to service providers of the Company) at any time prior to the earlier of (a) conversion of this Note, (b) a Qualified Financing Round or a Non-Qualified Financing Round, or (c) payment in full of all outstanding principal and accrued interest in accordance with this Note, the Company shall provide the Lender with written notice of such sale or issue of shares no later than five (5) days after the closing date thereof, including the price and terms of such convertible instruments (the “Subsequent Instruments”). In the event the Lender determines, in its sole and absolute discretion, that any Subsequent Instrument contains terms more favorable to the holder(s) thereof than the terms set forth in this Note, the Lender may elect to exchange this Note for a Subsequent Instrument.][9]
12. Waiver. The waiver, express or implied, by the Lender of any right under this Note or any failure to perform or breach by the Company shall not constitute or be deemed a waiver of any other right under this Note.
13. Waiver; Amendment. No failure to exercise or delay in exercising any right or remedy or under the Note shall operate as a waiver thereof nor shall any single or partial exercise operate to preclude any other right or remedy. No specific remedy hereunder shall be construed as excluding remedies at law. No amendment, change or addition hereto shall be effective or binding on any party unless reduced to writing and executed by all the parties for the time being.