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Overview

The Series Seed Convertible Promissory Note is a debt instrument that converts into equity under specified circumstances. It represents a loan from the investor to the company that bears interest and converts into stock upon a qualified financing, maturity, or change of control.
This is a legally binding promissory note creating an obligation to repay debt or convert to equity. Both companies and investors should carefully review conversion mechanics and triggering events.

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Document Information

Source: Cooley LLP Series Seed
Format: Available in .md
Documentation Generator: cooleygo.com/seednotes/

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Note Structure

The note begins with a securities law legend and includes:

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Header Information

Note Series: Identifier for this series of notes (e.g., “Seed 2026 Notes”)Date of Note: Issuance date (starts interest accrual)Principal Amount: Dollar amount invested by this HolderPromise to Pay: Company promises to pay principal plus interestInterest Terms:
  • Annual rate (typically 2-8%)
  • Simple or compounded annually
  • Accrues on outstanding principal
  • Computed on 365-day year basis
Maturity Date: When principal and interest become due and payable upon request of Majority Holders

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Basic Terms

This note is part of a series issued to multiple investors:
  • Designated by Note Series identifier
  • May have aggregate cap on total principal amount
  • Issued in multiple closings to various Holders
  • Company maintains ledger of all Holders
Majority Holders: Holders of majority of outstanding principal amount have special rights to:
  • Request payment at maturity
  • Elect conversion at maturity (if optional)
  • Consent to prepayment
  • Consent to amendments
  • Declare Events of Default
Payment Method: Lawful money of the United StatesPro Rata Payments: All payments distributed proportionally among HoldersApplication Order:
  1. Accrued interest first
  2. Principal second
Prepayment: Not permitted prior to Maturity Date without Majority Holder consent
The prohibition on prepayment prevents the company from forcing investors to accept cash repayment when they prefer to maintain conversion rights.
If company issues Other Debt with more favorable material terms:Process:
  1. Company provides written notice within 30 days
  2. Company provides all documentation for Other Debt
  3. Holder has 5 days to elect preferable terms
  4. Company must amend note within 30 days to match Other Debt
Scope: Amendment makes note “substantially identical” to Other Debt, excluding principal and accrued interest
MFN provisions can create complexity if you issue notes with varying terms to different investors. Consider keeping terms consistent.

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Conversion and Repayment

This is the most critical section, defining when and how the note converts:
Trigger: Company issues Equity Securities to Investors in financing with proceeds of at least specified minimum (commonly 500,000to500,000 to 1,500,000)Conversion Formula:Option 1 - Discount Only:
Conversion Price = QF Price × Discount Multiplier
Example: $1.00 × 0.80 = $0.80 per share (20% discount)
Option 2 - Cap and Discount:
Conversion Price = Lesser of:
(a) QF Price × Discount Multiplier, OR
(b) Valuation Cap ÷ Fully-Diluted Shares

Example with $5M cap, 10M shares, $1.00 QF price, 20% discount:
(a) $1.00 × 0.80 = $0.80
(b) $5,000,000 ÷ 10,000,000 = $0.50
Conversion Price = $0.50 (cap applies, better for investor)
Shares Issued:
Shares = (Principal + Accrued Interest) ÷ Conversion Price

Example: ($100,000 + $4,000) ÷ $0.50 = 208,000 shares
Automatic Conversion: Occurs automatically without further action by HolderSecurities Received: Same securities sold in Qualified Financing (or optionally, newly created series with same rights but at conversion price)
When cap applies in an up-round, the company may create a “shadow series” with the same rights as the new preferred but at the discounted conversion price, affecting liquidation preference calculations.
If company raises equity that doesn’t meet Qualified Financing threshold:Option 1 - Majority Holders Election: Holders of majority of notes may elect to treat as Qualified FinancingOption 2 - Individual Holder Election: Each Holder individually may elect to convertTiming: Election must occur on or before Maturity Date (or while note remains outstanding)This flexibility allows conversion even if the round is smaller than originally contemplated.
If note remains outstanding on Maturity Date, three options:Option 1 - Automatic Conversion:
  • Converts automatically without Holder action
  • Into Common Stock OR newly created Preferred Stock (per Exhibit A)
  • At predetermined conversion price
Option 2 - Majority Holders Election:
  • Majority Holders elect prior to Maturity Date
  • To convert OR demand repayment
Option 3 - Individual Holder Election:
  • Each Holder elects prior to Maturity Date
  • To convert OR demand repayment
Conversion Price Calculation:
Conversion Price = Valuation Cap ÷ Outstanding Common Shares

Share count as of:
- Maturity Date, OR
- Date of Note (specified in note)

Includes:
- All convertible securities
- All outstanding options/warrants
- Option pool (if specified)

Excludes:
- Notes converting in same transaction
- Other convertible debt for capital raising (e.g., SAFEs)
Example:
Cap: $4,000,000
Common Shares: 8,000,000
Conversion Price: $4,000,000 ÷ 8,000,000 = $0.50/share

Note: $100,000 principal + $8,000 interest = $108,000
Shares: $108,000 ÷ $0.50 = 216,000 shares
If company is acquired before note converts:Scenario 1 - Cash Repayment (mandatory or at Holder election):
Payment = Principal + Accrued Interest [+ Premium]

Example with 50% premium:
$100,000 principal + $4,000 interest + $50,000 premium = $154,000
Scenario 2 - Conversion Option (if provided):
  • Holder elects to convert to Common Stock
  • At predetermined conversion price (typically cap-based)
  • Allows participation in acquisition proceeds as stockholder
  • Election must be made prior to Change of Control (commonly 5 days before)
Change of Control Definition:
  1. Merger/consolidation where:
    • Company not surviving, OR
    • Pre-transaction shareholders don’t hold majority post-transaction
  2. Transaction(s) transferring more than 50% of voting power
  3. Sale/transfer of substantially all assets
  4. Exclusive license of substantially all IP
Whether Change of Control payment includes a premium (and the premium percentage) is a key negotiation point. Premium compensates investors for early exit.
To convert:
  1. Surrender Note: Holder delivers original note to Company
  2. Execute Documents: Sign all required documentation
    • For Qualified Financing: All investor documents
    • For other conversions: As reasonably required
  3. Receive Stock: Company issues shares
Fractional Shares: Company pays cash for fractions instead of issuing fractional sharesInterest Accrual Stop: If Change of Control or Qualified Financing, interest stops accruing up to 10 days before definitive agreement signing

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Representations and Warranties

Company represents and warrants:Organization and Authority:
  • Duly organized, validly existing, in good standing
  • Has corporate power to issue note
  • Board approved issuance
Valid Obligation:
  • Note is valid and binding
  • Enforceable per terms (subject to bankruptcy laws)
  • Conversion Securities validly issuable when converted
Governmental Consents: All required consents obtainedCompliance with Laws: No violations that would have Material Adverse EffectNo Conflicts: Issuance doesn’t violate charter, bylaws, or material agreementsNo Bad Actors: No disqualifying events under Rule 506(d)Securities Law Compliance: Issuance exempt from registration (assuming Holder rep accuracy)Use of Proceeds: For business operations only, not personal use
Holder represents and warrants:Investment Intent: Acquiring for own account, not for distributionInformation and Sophistication:
  • Received all requested information
  • Had opportunity to ask questions
  • Has knowledge/experience to evaluate investment
Ability to Bear Risk: Can hold indefinitely and suffer complete lossTransfer Limitations: Won’t sell unless:
  • Registered under Securities Act, OR
  • Opinion of counsel that exemption available, OR
  • In compliance with Rule 144
Accredited Investor: Qualifies as accredited investor under Rule 501No Bad Actor: Not subject to disqualification events (except with disclosure)Foreign Investors (if applicable): Complied with all laws of jurisdictionForward-Looking Statements: Acknowledges projections may not be accurate

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Events of Default

An Event of Default occurs if:
  1. Payment Default: Company fails to pay principal or interest when due
  2. Voluntary Bankruptcy: Company files bankruptcy, seeks reorganization, or makes assignment for benefit of creditors
  3. Involuntary Bankruptcy: Involuntary petition filed and not dismissed within 60 days, or custodian/receiver appointed
Consequences:
  • Note accelerates (at Majority Holders’ option)
  • All principal and interest become immediately due
  • Company pays Holder’s reasonable attorneys’ fees and costs
  • Automatic for bankruptcy events (no notice required)
An Event of Default can have serious consequences. Companies should ensure they can meet payment obligations if notes don’t convert.

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Additional Provisions

For up to 180 days following Company’s IPO:
  • Holder agrees not to sell Securities
  • Must enter into underwriter lock-up agreement
  • Applies only if officers/directors/1% holders similarly bound
Enforcement:
  • Company may impose stop transfer instructions
  • Underwriters are third-party beneficiaries
With Holder Consent: Any term may be amended with Company and Holder written consentWith Majority Holders: Any term may be amended with Company and Majority Holders consent
  • Binds all Holders
  • Company must notify non-consenting Holders
Majority Holders can amend notes to bind all Holders, so minority Holders should pay attention to proposed amendments.
Note is subordinated to Senior Indebtedness:Senior Indebtedness Definition:
  • Bank loans or lending institution debt
  • Excludes venture capital/investment firms
  • Includes refinancings and guarantor payments
Effect: In bankruptcy or liquidation, senior lenders get paid before noteholders
Notes may be transferred:
  • Upon surrender to Company
  • With proper endorsement
  • Company reissues in transferee name
Payment to Registered Holder: Company only obligated to pay registered holder on company records
Governed by Delaware law (typically), without regard to conflicts of law principles

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Exhibit A: Terms of Series Preferred Stock

If notes convert at maturity into newly created preferred stock:
Liquidation Preference: Original purchase price before common distributionsConversion:
  • Voluntary at holder’s option, 1:1 to common (subject to adjustments)
  • Automatic upon IPO or majority holder consent
Voting: Equal to common on as-converted basisProtective Provisions: Majority consent required to:
  • Adversely alter preferred rights
  • Change authorized shares
Optional Investor Rights:
  • Pro rata participation rights (terminates at IPO or after 7 years)
  • Annual and quarterly financial statements (terminates at IPO)
Market Stand-Off: 180-day IPO lock-up

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Key Considerations

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For Companies

Advantages:
  • Quick to close
  • No immediate valuation needed
  • Less dilutive initially
  • Lower legal costs
Risks:
  • Creates debt obligation
  • Interest accrues
  • May need to repay if no equity round
  • Can complicate future financings
Best Practices:
  • Keep terms consistent across investors
  • Track all notes and accrued interest
  • Plan to raise equity before maturity
  • Model dilution under various scenarios

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For Investors

Advantages:
  • Discount to future round
  • Downside protection (debt instrument)
  • Senior to equity in liquidation
  • Potential for significant upside if cap applies
Risks:
  • May convert at unfavorable time
  • Company may fail before conversion
  • Limited governance rights until conversion
  • Subordinate to bank debt
Best Practices:
  • Understand conversion mechanics thoroughly
  • Verify accredited investor status
  • Monitor company progress
  • Track maturity date

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Common Variations

  • Interest Rate: 2% to 8% annually
  • Discount: 15% to 25%
  • Valuation Cap: Varies widely based on company stage
  • Maturity: 12 to 24 months common
  • Change of Control Premium: 0% to 100%+ of principal
  • MFN Clause: May be omitted in some cases

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Additional Resources

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