Convertible note drafting workflow
A convertible note is a short debt instrument that converts to equity on a future priced round. The commercial terms — valuation cap, discount, trigger, and maturity fallback — and the Chapter 6D disclosure position have to fit together; a cap without a discount is not the same deal as a cap with a discount.
This is an 8-step workflow for drafting a convertible note for an Australian early-stage company under the Corporations Act 2001 (Cth). It runs from commercial terms through valuation cap, discount, conversion triggers, and Chapter 6D fundraising compliance.
Before you start
- Signed costs agreement and conflict check
- Instructions on commercial terms (amount, cap, discount, interest, maturity)
- Existing shareholders agreement and constitution
- Cap table and Chapter 6D disclosure analysis
The workflow
Confirm the commercial structure
Confirm the principal, interest rate, valuation cap, discount, conversion trigger, maturity, and whether the note is secured. Document in a short term sheet before drafting.
Check Chapter 6D fundraising compliance
Assess whether the note is being offered to sophisticated, professional, or retail investors. Apply the s 708 exemptions or prepare a disclosure document as required.
Check existing cap table and pre-emptive rights
Review the existing shareholders agreement for pre-emptive rights, director approval thresholds, and any anti-dilution mechanics that interact with a convertible note conversion.
Draft the conversion mechanics
Draft the mechanics for qualifying financing, maturity, and change-of-control. Ensure the cap and discount interact correctly, with a worked conversion example annexed.
Draft investor protections and noteholder rights
Draft information rights, observer rights, most-favoured-nation clauses, and any restriction on further debt or security above the note.
Draft warranties and events of default
Draft company warranties (corporate, capitalisation, IP, tax), events of default, acceleration, and redemption rights on maturity if no qualifying financing occurs.
Prepare corporate approvals and ASIC filings
Prepare the directors' resolution, sophisticated investor certificates (s 708(8)) where relied on, and any ASIC Form 484 updates on issue of shares at conversion.
Execute, record, and update the cap table
Execute the note deed electronically under s 126, record the note on the company's register, and update the cap table to show the convertible security and the worked-through conversion.
What you will have at the end
An executed convertible note deed with Chapter 6D-compliant offer, clear conversion mechanics, and an updated cap table showing the convertible security alongside existing equity.
Common issues
- Cap and discount interaction produces a result the founders did not intend
- Sophisticated investor certificates relied on without current s 708(8) evidence
- Maturity repayment obligation unaffordable if no qualifying financing occurs
- Pre-emptive rights in existing shareholders agreement not addressed
- Conversion on a change of control economically subordinate to trade sale consideration
Run this workflow on a real matter
Quillio drafts the note deed, runs Chapter 6D compliance, and produces a worked conversion schedule across cap, discount, and maturity scenarios. See /practice-areas/commercial-lawyers or start a free trial at /free-trial.
General guide only — not legal advice. Convertible notes interact with tax (ESIC/ESVCLP, Division 974) and accounting treatment; obtain specialist advice.
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Quillio can run this workflow on a real matter, with citations to current AU authority on every step. The free trial requires no credit card.
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