Angel Capital Association's New Model Convertible Promissory Note: Key Features and Alternative Provisions

In response to the significant increase in the use of convertible instruments for early-stage financing, the ACA created a new Model Note in an all-in-one document that combines common convertible promissory note features with "best practice" provisions often found in side letters or note purchase agreements and includes alternative provisions for consideration. The Model Note, along with the accompanying Model Note Term Sheet, aims to streamline the use of convertible notes in early-stage financing and endeavors to balance the rights of founders and investors. The new Model Note has the potential to boost early-stage investment by reducing confusion between the parties, setting achievable expectations, and encouraging transparency, thereby making transactions more efficient and cost-effective.

The Model Note incorporates provisions for conversion into equity and outlines the typical provisions for conversion, including a discount to the next round and valuation cap. The key features of the new Model Note include various optional provisions such as expanded representations and warranties, participation rights in future financings, select information rights, most favored nation rights, board observer rights, and protective provisions.

Listen as our expert panel, who were members of the task force that drafted the Model Note, reviews the Model Note's key features and structures and highlights its usefulness in the early stage venture capital ecosystem.