Conversion Agreement Template

In plain language: Identifies the converting party (creditor or holder) and the issuing party (company or debtor) by their full legal names and describes the background and purpose of the conversion.

Common mistake: Using a trade name instead of the registered legal entity name for either party. If the entity name does not match the cap table or corporate registry, the shares issued may be attributed to the wrong legal person.

In plain language: Precisely identifies the debt, note, or other instrument subject to conversion — including the original principal amount, any accrued interest, the issue date, and the outstanding balance at conversion.

Common mistake: Failing to account for accrued interest in the Outstanding Balance. Omitting accrued interest means the Holder may have a residual unsatisfied claim after conversion, creating a future dispute.

In plain language: States the price per share (or unit) at which the outstanding balance converts, whether a discount or valuation cap applies, and the resulting number of shares to be issued.

Common mistake: Not specifying which class of shares is issued on conversion. Leaving the class open creates ambiguity about voting rights, liquidation preferences, and dividend entitlements at the point of conversion.

In plain language: Lists the events or approvals that must occur before the conversion becomes effective — such as completion of a qualifying financing round, board approval, or regulatory clearance.

Common mistake: Setting conditions that are vague or within a single party's complete control. A condition like 'subject to Company's satisfaction' gives one party unilateral power to block conversion indefinitely.

In plain language: Describes what happens at closing — the cancellation of the converted instrument, the delivery of share certificates or electronic book-entry, and the timeline for completing these steps.

Common mistake: Failing to document the cancellation of the original instrument at closing. If the note is not formally cancelled, the Holder may later assert that the debt still exists independently of the shares received.

In plain language: Statements by the company confirming it has authority to issue shares, that the shares will be validly issued and fully paid, that the capitalization table is accurate, and that there are no undisclosed encumbrances.

Common mistake: Giving reps that are accurate at signing but not at closing. If the cap table changes between signature and the conversion closing date, the stale representation can expose the company to misrepresentation claims.

In plain language: Statements by the converting party confirming they own the instrument free of liens, have authority to convert, and are acquiring shares for their own account (satisfying securities law exemptions).

Common mistake: Omitting the investment-purpose representation. Without it, the share issuance may not qualify for a private placement exemption under applicable securities law, exposing the company to unregistered offering liability.

In plain language: Specifies any price adjustment protections if the company later issues shares at a lower price, and any right of the Holder to participate in future rounds to maintain their ownership percentage.

Common mistake: Including a full-ratchet anti-dilution clause without understanding its punitive effect. Full-ratchet resets the conversion price to the new lower price regardless of how few shares are issued at the lower price — this can dramatically dilute founders and other investors.

In plain language: Addresses the tax characterization of the conversion (e.g., whether accrued interest is treated as ordinary income), and each party's acknowledgment that they have sought independent tax and legal advice.

Common mistake: Omitting any tax acknowledgment language and treating conversion as a purely mechanical financial event. Accrued interest converted to equity is typically taxable income to the Holder even though no cash is received — failing to flag this creates surprise tax liability.

In plain language: States the jurisdiction whose law governs the agreement, confirms the document supersedes all prior understandings, and includes standard boilerplate on amendments, counterparts, and notices.

Common mistake: Selecting a governing law that has no connection to either party or the transaction. Courts in several jurisdictions will apply local law regardless of a contractual choice-of-law clause that lacks a reasonable relationship to the parties.

A conversion agreement is a legally binding contract that governs the transformation of one financial instrument or legal interest into another. The most common use is converting outstanding debt — such as a loan or promissory note — into equity shares in the issuing company. It sets out the conversion price, the number of shares to be issued, any conditions that must be met, and the mechanics of closing the transaction.

Conversion agreements are most frequently used when a convertible note or bridge loan matures or reaches a qualifying financing trigger and the holder elects or is required to take equity rather than repayment. They are also used when a company restructures its balance sheet by converting shareholder loans to equity, when preferred shares convert to common upon an IPO or acquisition, and when an LLC converts to a corporation and existing interests must be formally redesignated.

A convertible note is the original instrument — a loan document that contains built-in conversion rights from the outset. A conversion agreement is the separate document executed at the moment of actual conversion to formally effect the exchange of debt for equity. Think of the convertible note as the contract that creates the right, and the conversion agreement as the closing document that exercises it and records the transaction.

Yes. A conversion agreement is a bilateral contract and requires execution by both the company (or debtor) and the holder (or creditor). Both signatures should be obtained before or on the conversion closing date. Conversion mechanics that occur automatically under a note's terms still benefit from a signed confirmation agreement to create a clear audit trail for the cap table, future investors, and tax authorities.

A valuation cap is a ceiling on the company valuation used to calculate the holder's conversion price, regardless of how high the next round actually values the company. If a note has a $5M valuation cap and the company raises a round at a $10M valuation, the holder converts at the $5M-implied price — receiving twice as many shares as investors in the new round. The cap rewards early investors for taking risk before the company's value was established.

In most jurisdictions, a conversion agreement converting an oral or undocumented loan into equity faces significant enforceability risk. Courts generally require the underlying obligation to be sufficiently certain in amount and terms before a conversion can be given legal effect. If the original loan was not documented in writing, both parties should first execute a promissory note formalizing the debt, then enter the conversion agreement referencing that note. Consider consulting a lawyer in this situation.

Tax treatment typically depends on jurisdiction, but in most cases the holder must recognize accrued interest as ordinary income in the year of conversion even though no cash is received. For the company, cancellation of debt in exchange for equity can in some circumstances give rise to cancellation of indebtedness income under US tax rules, though specific exemptions may apply. Both parties should consult a tax advisor before executing a conversion agreement, as the consequences vary meaningfully by structure and jurisdiction.

Yes. It is common to include anti-dilution provisions that adjust the conversion price downward if the company later issues shares at a lower price. The two main formulas are broad-based weighted average (industry standard, moderate protection) and full-ratchet (aggressive, resets the price to the new lower price regardless of the number of shares issued). Most startup investors and company counsel prefer broad-based weighted average because full-ratchet can severely dilute founders and later investors in a down round.

For straightforward debt-to-equity conversions between known parties with a clearly documented original instrument, a high-quality template is a sound starting point. Engage a lawyer when the conversion involves a material amount, complex securities law considerations, multiple creditors, regulatory approvals, cross-border parties, or when the capitalization structure is already complex. A 2–4 hour legal review typically costs $400–$1,000 and is worthwhile for any conversion that will materially affect the company's cap table.