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Convertible Note Purchase Agreement Template (Free Download + AI Generator)
Greg Mitchell | Legal consultant at AI Lawyer
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A Convertible Note Purchase Agreement (CNPA) is a contract used in early-stage fundraising where investors lend money to a startup via promissory notes that convert into equity later — usually at a priced round or on other trigger events. Notes typically include a discount, a valuation cap, interest accrual, and a maturity date, giving investors downside protection while deferring valuation debates. For founders, notes are faster to execute than equity rounds and keep legal costs lower before product-market fit.
Two market realities underscore why CNPAs remain central to startup finance. First, investment vehicles (e.g., venture, private equity, hedge funds) raised about $1.38 trillion in 2023 under Regulation D, highlighting how exempt offerings dominate private capital formation in the U.S. (SEC DERA). Second, venture capital volumes fell 16.2% year-over-year in 2022 yet remained ~40% above pre-pandemic levels, showing a choppier environment that favors flexible, bridge-style instruments like notes (OECD).
Download the free Convertible Note Purchase Agreement Template or customize one with our AI Generator, then have a local attorney review before you sign.
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1. What Is a Convertible Note Purchase Agreement?
A CNPA records the sale and purchase of convertible promissory notes. The agreement sets the amount invested, the interest rate, and the conversion mechanics (discount and/or valuation cap), then adds investor protections such as information rights, most-favored-nation (MFN) for later notes, and basic representations and warranties.
Unlike priced equity rounds, CNPAs postpone valuation until a qualified financing or other trigger. On conversion, the note principal plus accrued interest converts into preferred or shadow preferred shares at a price derived from the cap or discount. If conversion never happens before maturity, the note may be extended, repaid, or convert at a fallback price if the parties agree.
2. Why CNPAs Matter in 2025?
CNPAs are particularly useful in a market that is capital-selective and timing-sensitive:
Founders can close funds incrementally without negotiating a full valuation, keeping momentum between milestones.
Investors obtain economics tied to future equity while having debt-like priority until conversion, helping bridge risk in uncertain cycles.
Hybrid and cross-border rounds are common; notes simplify participation from multiple investors on consistent terms.
Regulatory attention on retail crowdfunding and complex structures is rising; plain-English note terms and clear risk disclosure help avoid problems (Investor.gov guidance on convertibles and crowdfunding risk).
This context favors instruments that are quick to execute, transparent, and compatible with later priced rounds.
3. Key Clauses and Components
Principal, Interest, and Maturity: State the investment amount, simple interest rate, accrual method, and the maturity date when repayment or another outcome is required.
Conversion Mechanics: Define conversion triggers such as a qualified equity financing, and set the discount or valuation cap formula, specify which applies and how conflicts are resolved.
Qualified vs. Non-Qualified Financing: Explain minimum raise thresholds for automatic conversion and the process for discretionary conversion in smaller rounds.
MFN and Pari Passu: Provide that future notes with better economics can be elected by existing noteholders; confirm equal ranking among notes.
Change of Control and Liquidity Events: Set cash-out multiples or conversion outcomes if the company is sold before a priced round.
Events of Default: Identify triggers like non-payment, insolvency, or covenant breach, and specify investor remedies.
Information Rights: Provide basic quarterly financials and cap-table updates while respecting confidentiality.
Representations & Warranties: Include organization, authorization, capitalization snapshot, IP ownership basics, and compliance with laws.
Investor Eligibility: Confirm accredited status for Regulation D or other local exemptions.
Governing Law & Dispute Resolution: Choose venue and method (courts or arbitration) and include notices.
4. Legal and Regulatory Considerations by Region
United States: Most early-stage note sales rely on Regulation D exemptions; issuers must verify accredited status when using Rule 506(c) and comply with Form D filing requirements. SEC bulletins caution that convertible securities and SAFEs can obscure risk, so disclosure is critical.
United Kingdom: Early rounds sometimes use advance subscription agreements (ASAs) that convert into shares later; HMRC’s Venture Capital Schemes Manual explains ASA treatment within EIS/SEIS context.
European Union: Local private placement and crowdfunding rules vary; GDPR affects investor data handling; national securities regulators may restrict general solicitation. OECD reporting highlights government VC participation patterns that influence market design.
Canada and Other Jurisdictions: Private placements use offering memorandum or accredited-investor exemptions; privacy laws govern investor data; interest-rate and usury limits may apply.
Always localize your CNPA to the jurisdiction of incorporation and investor locations.
5. How to Customize Your CNPA?
Pick economics that fit runway: Choose a cap that reflects current traction and realistic next-round pricing; set discounts to reward early risk without creating down-round optics.
Coordinate with equity docs: Anticipate terms in the next preferred round (liquidation preference, pro-rata rights) and align conversion class accordingly.
Clarify maturity strategy: Decide in advance whether extensions require noteholder majority, board approval, or automatic options.
Address cap table hygiene: Add a running conversion model in an annex so everyone sees post-money outcomes under different scenarios.
Handle pro-rata and MFN: Give early supporters rights to join the priced round proportionally; keep later notes from leapfrogging earlier investors unless everyone gets the option.
6. Step-by-Step Guide to Negotiating and Signing
Step 1-Define the raise: Decide target amount, minimum close, and tranche timing; confirm exemption path (e.g., Rule 506(b) or 506(c)).
Step 2-Set economics: Agree on cap, discount, interest rate, maturity, and what counts as a qualified financing.
Step 3-Document investor eligibility: Collect accredited-investor reps, KYC details, and investor questionnaires.
Step 4-Draft the CNPA and form of note: Use the template; fill schedules for investors, amounts, and signing blocks.
Step 5-Model conversion outcomes: Share a cap-table scenario sheet showing dilution at multiple next-round prices.
Step 6-Add information and MFN rights: Keep them lightweight but sufficient for oversight and parity across notes.
Step 7-Plan for change of control: Choose conversion vs. repayment multiples so outcomes are predictable if an exit happens early.
Step 8-Execute and close: Collect signatures, wire confirmations, and board approvals; issue countersigned notes.
Step 9-File and record: Make required securities filings (e.g., Form D in the U.S.) and maintain a secure investor ledger.
Step 10-Communicate regularly: Send brief updates and metrics; prepare for the qualified financing that will convert the notes.
7. Tips for Cap Tables, Compliance, and Speed
Model before you sign: Show how the cap and discount interact with multiple next-round prices so no one is surprised at conversion.
Limit bespoke terms: Standardize notes to avoid a messy stack of conflicting agreements that slow the priced round.
Track interest cleanly: Accrue simple interest per note and reflect it in the conversion spreadsheet.
Mind data and disclosures: Use clear risk summaries, particularly about maturity and down-round risk; align with Investor.gov cautions on convertibles.
Set extension mechanics: Pre-agree whether a majority-in-interest can extend maturity to avoid individual vetoes.
Coordinate with tax and accounting: Confirm interest accrual, OID treatment, and when to recognize conversion for books and tax.
8. Checklist Before You Finalize
Raise size, tranche plan, and exemption confirmed.
Cap, discount, interest rate, and maturity stated clearly.
Qualified financing, change-of-control, and default outcomes defined.
MFN, pari passu, and information rights included as needed.
Cap-table conversion model attached and reviewed with investors.
Investor eligibility and KYC/AML records collected and stored.
Form D or local filings calendared; data-privacy notices provided.
Signatures, wiring instructions, and board approvals complete.
Download the Full Checklist Here
9. Common Mistakes to Avoid
Over-low caps that over-dilute founders at conversion.
Stacking inconsistent notes with different economics that are hard to reconcile.
Vague qualified-financing definitions that cause disputes on conversion day.
Ignoring maturity until it’s imminent rather than planning extensions.
Missing filing deadlines or investor eligibility checks for the chosen exemption.
Forgetting to circulate a clear, shared conversion model.
10. FAQs
Q: How do valuation caps and discounts interact at conversion?
A: Many CNPAs apply the better of the cap-based price or the discounted round price. For example, a 20% discount gives a price equal to 80% of the round price, while a $12M cap divides that cap by the company’s fully diluted shares to compute a share price. The note converts at the lower of these two, giving investors protection whether the round is high or modestly priced. Spell out the exact formula to avoid confusion.
Q: What happens at maturity if there’s no priced round yet?
A: The company and a majority-in-interest of noteholders often agree to extend the maturity date, repay the notes, or convert at a fallback price formula. Having this path pre-negotiated prevents last-minute stalemates. If the company cannot pay and investors won’t extend, default remedies may apply — so forward planning is key.
Q: Do convertible notes always earn interest?
A: Most do, typically at a simple annual rate that accrues to principal and converts with it. Some founders prefer very low rates to limit accrual-driven dilution; investors may accept this if the cap or discount is attractive. Whatever you choose, keep the math simple and share a working model with investors so expectations stay aligned.
Q: How do CNPAs compare with SAFEs?
A: SAFEs are not debt and generally lack maturity or interest, so they can be lighter-weight administratively. Notes provide a time-bound structure and interest, which some investors prefer in uncertain markets. Regulators caution that both instruments can be complex for non-professionals, so clear terms and disclosures are essential.
Q: What filings are required in the U.S. after closing a CNPA?
A: Most issuers file Form D within 15 days of the first sale when relying on Regulation D, and they keep state “blue sky” filings in view where applicable. If using Rule 506(c), the issuer must also take reasonable steps to verify accredited status. Good record-keeping on investor eligibility and timely filings helps avoid regulatory headaches.
Sources and References
Data and regulatory insights in this article are drawn from official and publicly available materials, including the SEC Division of Economic and Risk Analysis (DERA) Regulation D Report; the OECD Venture Capital and SME Financing Outlook 2023–2024; and Investor.gov guidance on convertible and crowdfunding risks.
Regional regulatory notes reference the U.K. HMRC Venture Capital Schemes Manual for Advance Subscription Agreements (ASAs), the EU GDPR framework, and Canadian Securities Administrators (CSA) guidance on private placement exemptions.
Supplementary insights on cross-border fundraising and note structuring are informed by OECD market data, SEC filings under Regulation D (Rules 506(b)/(c)), and publicly available investor education bulletins.
Disclaimer
This article is for informational purposes only and does not constitute legal, tax, or investment advice. Securities laws, exemptions, and tax treatment vary by jurisdiction and change over time. Always consult licensed counsel before drafting, signing, or relying on a Convertible Note Purchase Agreement.
Get Started Today!
A well-drafted CNPA lets founders close quickly while giving investors fair protection and upside. Keep terms clear, model conversion outcomes, and align the note stack with your next equity round.
Download the free Convertible Note Purchase Agreement Template or customize one with our AI Generator, then have a local attorney review before you sign.
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