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and does not constitute advertising, a solicitation, or legal advice. Neither the transmission of this sample Convertible Security nor the transmission of any information contained in this website is intended to create, and receipt hereof or thereof does not constitute formation of, an attorney-client relationship. This sample Convertible Security was drafted for companies incorporated in Delaware with principal executive offices in California for use with California purchasers that qualify under applicable state and federal securities laws. Internet subscribers and online readers should not rely upon this sample Convertible Security or the information contained in this website for any purpose without seeking legal advice from a licensed attorney in the reader’s state. The information contained in this website is provided only as general information and may or may not reflect the most current legal developments; accordingly, information on this website is not promised or guaranteed to be correct or complete. Wilson Sonsini Goodrich & Rosati expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this website. Further, Wilson Sonsini Goodrich & Rosati does not necessarily endorse, and is not responsible for, any third-party content that may be accessed through this website.
THIS CONVERTIBLE SECURITY AND ANY SECURITIES ISSUABLE UPON THE CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR AN EXEMPTION THEREFROM. [INSERT COMPANY NAME] CONVERTIBLE SECURITY FOR VALUE RECEIVED, [insert name of company], a [Delaware] corporation (the “Company”), hereby issues to [insert name of investor] (the “Holder”) this Convertible Security. This Convertible Security is one of the “Convertible Securities” issued pursuant to the Company’s Convertible Securities Purchase Agreement, dated as of [insert date] (the “Purchase Agreement”). Capitalized terms used but not defined herein shall have the meanings ascribed to such terms in the Purchase Agreement. In the event of a Change of Control (as defined below), the Investment Amount shall be converted into fully paid and nonassessable shares of the Company’s Common Stock at a price per share equal to the price obtained by dividing (a) $[4,000,000] by (b) the Company’s Fully-Diluted Capitalization (as defined below) as of immediately prior to the Change of Control. “Change of Control” shall mean (i) any “person” or “group” (within the meaning of Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of more than 50% of the outstanding voting securities of the Company having the right to vote for the election of members of the Board of Directors, (ii) any reorganization, merger or consolidation of the Company, other than a transaction or series of related transactions in which the holders of the voting securities of the Company outstanding immediately prior to such transaction or series of related transactions retain, immediately after such transaction or series of related transactions, at least a majority of the total voting power represented by the outstanding voting securities of the Company or such other surviving or resulting entity, or (iii) a sale, lease or other disposition of all or substantially all of the assets of the Company. “Fully Diluted Capitalization” means the sum of (i) all shares of the Company’s capital stock (on an as-converted basis) issued and outstanding, assuming exercise or conversion of all options, warrants and other convertible securities, excluding this Convertible Security and the other Convertible Securities issued under the Purchase Agreement, and, except with respect to conversions of this Convertible Security in connection with a Change of Control, (ii) all shares of the Company’s Common Stock reserved and available for future grant under any equity incentive or similar plan of the Company.
If a Qualified Equity Financing (as defined below) occurs prior to the occurrence of a Change of Control, then the Investment Amount shall automatically convert into fully paid and nonassessable shares of the Company’s Preferred Stock issued in such Qualified Equity Financing and Common Stock at a price per share equal to the lower of (a) the price obtained by dividing (i) $[4,000,000] by (ii) the Company’s Fully Diluted Capitalization as of immediately prior to the Qualified Equity Financing or (b) [eighty percent (80%)] of the price per share paid by the other purchasers of Preferred Stock in such Qualified Equity Financing (the “Discounted Conversion Price”). The total number of shares issuable upon such conversion shall be determined by dividing the Investment Amount by the Discounted Conversion Price (the “Total Number of Shares”). The Total Number of Shares shall consist of (A) that number of Preferred Stock obtained by dividing (x) the Investment Amount by (y) the price per share paid by other purchasers of Preferred Stock in the Qualified Equity Financing (the “Number of Preferred Stock”) and (B) that number of Common Stock equal to the Total Number of Shares minus the Number of Preferred Stock. Upon such conversion, Holder hereby agrees to execute and deliver to the Company all transaction documents entered into by other purchasers participating in the Qualified Equity Financing, including a purchase agreement, an investor rights agreement and other ancillary agreements, with customary representations and warranties and transfer restrictions (including, without limitation, a 180-day lock-up agreement in connection with an initial public offering). “Qualified Equity Financing” means a transaction or series of transactions pursuant to which Company issues and sells shares of its Preferred Stock for aggregate gross proceeds of at least [$1,000,000] (excluding all proceeds from the incurrence of indebtedness that is converted into such Preferred Stock or otherwise cancelled in consideration for the issuance of such Preferred Stock) with the principal purpose of raising capital. No delay or omission on the part of the Holder in exercising any right under this Convertible Security shall operate as a waiver of such right or of any other right of the Holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. This Convertible Security may not be assigned, by operation of law or otherwise, by the Company without the prior written consent of the Holder. Upon the conversion of this Convertible Security, one or more certificates for the number of shares in which the Holder is entitled to receive pursuant to this Convertible Security shall be issued by the Company as soon as practicable after such conversion. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Convertible Security, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the price per share of the Company’s capital stock in which the Investment Amount converts pursuant to this Convertible Security, as reasonably determined by the Company’s Board of Directors on the date of such conversion. The Holder shall not be entitled, as a Convertible Security holder, to vote or receive dividends or be deemed the holder of the Company’s capital stock for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Convertible Security shall have been converted and the shares convertible upon the terms hereof shall have become deliverable, as provided herein. In the event any one or more of the provisions of this Convertible Security shall for any reason be held to be invalid, illegal or unenforceable, in whole or in part or in any respect, or in the event that any one or more of the provisions of this Convertible Security operate or would prospectively operate to invalidate this Convertible Security, then and in any such event, such provision(s) only shall be deemed null and void and shall not affect any other provision of this Convertible Security and the remaining provisions of this Convertible Security shall remain operative and in full force and effect and in no way shall be affected, prejudiced, or disturbed thereby.
All rights and obligations hereunder shall be governed by the laws of the State of California, without regard to the conflicts of law provisions of the State of California or any other state or commonwealth. (Signature page follows)
IN WITNESS WHEREOF, the undersigned has executed this Convertible Security as of the date first written above. [INSERT NAME OF COMPANY] By: [insert name] [insert title]
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