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Convertible Equity Agreement

Convertible Equity Agreement Template for South Africa

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Key Requirements PROMPT example:

Convertible Equity Agreement

"Need a Convertible Equity Agreement for my Cape Town-based tech startup seeking USD 2 million investment from a US venture capital firm, with a 20% discount rate and valuation cap of USD 10 million, convertible upon a Series A round in March 2025."

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Document background
The Convertible Equity Agreement serves as a crucial financing instrument in the South African business landscape, particularly for emerging companies seeking growth capital without immediate equity dilution. This document is typically employed when companies need flexibility in valuation timing and want to align investor returns with company success. It provides a framework for investment that converts into equity upon specific triggering events, such as qualified funding rounds or exits. The agreement must comply with South African Companies Act requirements, Financial Markets Act provisions, and relevant tax regulations. It includes detailed terms covering conversion mechanics, valuation adjustments, investor rights, and protection mechanisms, making it particularly suitable for high-growth companies in innovative sectors.
Suggested Sections

1. Parties: Identification of the Company, the Investor(s), and any other relevant parties to the agreement

2. Background: Context of the investment, purpose of the agreement, and brief description of the company's business

3. Definitions and Interpretation: Detailed definitions of terms used throughout the agreement and rules of interpretation

4. Investment Amount and Equity: Details of the investment amount and the equity rights being granted

5. Conversion Mechanics: Specific terms and conditions for conversion of the investment into equity, including triggering events and conversion price calculations

6. Company Representations and Warranties: Standard and specific warranties about the company's status, operations, and financial condition

7. Investor Representations and Warranties: Warranties from the investor regarding their investment capacity and compliance with laws

8. Information Rights: Investor's rights to receive financial and operational information from the company

9. Pre-emptive Rights: Rights of the investor in relation to future funding rounds

10. Transfer Restrictions: Limitations on the transfer of the convertible equity rights

11. Events of Default: Circumstances constituting default and consequences thereof

12. General Terms: Standard contractual provisions including notices, amendments, governing law, and jurisdiction

Optional Sections

1. Board Observer Rights: Optional rights for the investor to appoint an observer to the board - typically included for larger investments

2. Anti-dilution Protection: Additional provisions protecting the investor from dilution in certain circumstances - included when specifically negotiated

3. Most Favored Nation Clause: Provision ensuring the investor receives the benefit of any better terms granted to future investors - included for early-stage investments

4. Drag-along Rights: Rights forcing minority shareholders to join in the sale of the company - included for larger investments

5. Tag-along Rights: Rights allowing investors to join in sales by other shareholders - included when specifically requested

6. Confidentiality Provisions: Detailed confidentiality obligations - included when not covered by separate agreement

7. Founder Commitments: Specific obligations of founders - included when founders are key to the business

Suggested Schedules

1. Company Information: Detailed information about the company including registration details, share capital structure, and material contracts

2. Calculation of Conversion Price: Detailed formula and examples for calculating the conversion price in different scenarios

3. Warranties: Comprehensive list of warranties given by the company and/or founders

4. Cap Table: Current and post-conversion capitalization table of the company

5. Investor Rights: Detailed description of specific rights granted to the investor

6. Required Consents and Approvals: List of all regulatory and corporate approvals required for the investment

7. Form of Conversion Notice: Template notice to be used when exercising conversion rights

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Linkedin in social icon imageX social icon image
alex.den.21@genieai.co
Relevant legal definitions
Affiliate
Agreement
Board
Business Day
Company
Companies Act
Completion Date
Confidential Information
Conversion
Conversion Date
Conversion Notice
Conversion Price
Conversion Rights
Conversion Shares
Discount Rate
Effective Date
Encumbrance
Exit Event
Fair Market Value
Financial Year
Fully Diluted Share Capital
Group
Investment Amount
Investment Date
Investor
IPO
Liquidation Event
Liquidation Preference
Material Adverse Change
MOI
Most Favored Nation Rights
Ordinary Shares
Parties
Pre-emptive Rights
Pre-money Valuation
Post-money Valuation
Qualified Financing
Qualifying Investment Round
ROFR
Securities
Share Capital
Shareholders Agreement
Shares
Subscription Price
Trigger Event
Valuation Cap
Warranties
Relevant Industries

Technology

Financial Services

E-commerce

Healthcare

Renewable Energy

Biotechnology

Software Development

Artificial Intelligence

Fintech

Manufacturing

Agriculture Technology

Educational Technology

Digital Media

Clean Technology

Retail Innovation

Relevant Teams

Legal

Finance

Corporate Development

Investment

Risk and Compliance

Executive Leadership

Treasury

Corporate Secretariat

Business Development

Mergers and Acquisitions

Relevant Roles

Chief Executive Officer

Chief Financial Officer

Investment Manager

Legal Counsel

Corporate Lawyer

Investment Director

Venture Capital Partner

Private Equity Manager

Company Secretary

Financial Director

Startup Founder

Business Development Director

Corporate Development Manager

Investment Analyst

Risk Manager

Industries
Companies Act 71 of 2008: Primary legislation governing company operations, share issuance, and corporate governance in South Africa. Particularly relevant for provisions regarding share capital, rights of shareholders, and corporate restructuring.
Financial Markets Act 19 of 2012: Regulates financial markets and securities trading. Important for determining whether the convertible equity instrument qualifies as a security and ensuring compliance with securities regulations.
Income Tax Act 58 of 1962: Governs taxation implications of equity conversions, including potential capital gains tax considerations and tax treatment of converted securities.
Exchange Control Regulations 1961: Regulates foreign investment and cross-border financial transactions. Relevant if the agreement involves foreign investors or cross-border elements.
Consumer Protection Act 68 of 2008: May be applicable if one party qualifies as a consumer, affecting disclosure requirements and fair dealing provisions.
Financial Intelligence Centre Act 38 of 2001: Relevant for KYC (Know Your Customer) requirements and anti-money laundering compliance, particularly when dealing with new investors.
Protection of Personal Information Act 4 of 2013: Governs the handling of personal information of parties involved in the agreement, ensuring compliance with data protection requirements.
Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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