Convertible Note Term Sheet
For Informational Purposes Only
Non-binding term sheet with valuation cap, discount, MFN, and comprehensive investor protections
What This Document Does
A Convertible Note Term Sheet is a non-binding summary of the principal economic and legal terms for a convertible promissory note investment in a startup. The term sheet serves as the negotiation framework before definitive documents (the Note Purchase Agreement and the Convertible Promissory Note itself) are drafted. While most provisions are non-binding, the exclusivity and expense provisions typically are binding to prevent the company from shopping the deal or walking away after the investor has incurred legal fees.
This template covers 26 key terms organized into three sections: Economic Terms (the core deal economics including interest rate, maturity, conversion mechanics, valuation cap, and discount), Investor Protections (MFN, pro rata rights, information rights, and board observer rights), and Legal Terms (security, events of default, representations, covenants, and governing law). The two-column table format is the standard presentation for venture capital term sheets and facilitates side-by-side comparison of competing offers.
Why Startups Need This
Convertible notes remain one of the most widely used instruments for seed and pre-seed financing. A term sheet is essential because it forces both sides to agree on the key economic terms—particularly the valuation cap and conversion discount—before incurring the cost of drafting definitive documents. Without a term sheet, founders and investors often discover mid-negotiation that they have fundamentally different expectations about valuation, conversion mechanics, or investor protections, wasting time and legal fees. The term sheet also serves as a reference document for the company’s legal counsel when preparing the definitive note documents, reducing drafting cycles and ensuring that the final agreements accurately reflect the negotiated terms.
Key Provisions Explained
Valuation Cap and Conversion Discount
The two most critical economic terms in any convertible note are the valuation cap and the conversion discount, which together determine the price at which the note converts into equity. The valuation cap sets a maximum pre-money valuation at which the note will convert—if the company raises its next priced round at a valuation above the cap, the note holder converts at the cap price, capturing the upside. The conversion discount (typically 15%–25%) provides a percentage reduction from the price per share paid by new investors in the qualifying financing. The note converts at whichever mechanism yields the lower price per share—ensuring the investor receives the most favorable conversion rate. This template includes a cap-price formula that references fully-diluted capitalization, which is the standard market approach.
Conversion Mechanics
The template addresses three conversion scenarios. Automatic conversion occurs upon a Qualified Financing—typically defined as an equity financing raising at least $1 million (though this threshold is negotiable). The note principal plus accrued interest converts into the same class of preferred stock sold in the financing, at the lower of the cap price or discounted price. Optional conversion at maturity allows the investor to convert at the cap price if no Qualified Financing has occurred by the maturity date, rather than demanding repayment. Change of control conversion gives the investor an election: either receive a repayment multiple (typically 1.5x–2x the outstanding principal plus accrued interest) or convert at the cap price. These three scenarios cover the full range of outcomes and eliminate ambiguity about what happens to the note in each case.
Most Favored Nation
The MFN provision protects the investor against subsequent convertible instruments issued on more favorable terms. If the company issues another convertible note (or SAFE) with a lower valuation cap, higher discount, more favorable conversion terms, or additional investor protections, the existing note is automatically amended to incorporate those more favorable terms. This prevents the company from offering better economics to later investors while early investors remain locked into less favorable terms. The template frames this as an automatic amendment right, which is stronger than a mere notification right—the investor does not need to negotiate or request the improved terms.
Events of Default
The template specifies five triggering events: failure to pay principal or interest when due (with a 5-business-day cure period), material breach of representations or covenants (with a 30-day cure period), voluntary or involuntary bankruptcy or insolvency, entry of a judgment exceeding a specified dollar threshold, and cross-default to other material indebtedness. Upon an Event of Default, the outstanding balance becomes immediately due and payable—or, at the investor’s election, immediately convertible at the cap price. The cure periods balance investor protection with practical reality, giving the company an opportunity to remedy technical defaults before triggering acceleration.
Emerging Provisions (2025–2026 EDGAR Benchmarks)
SAFE vs. Convertible Note Convergence
The venture financing market in 2025–2026 has seen increasing convergence between SAFE and convertible note structures. While SAFEs (Simple Agreements for Future Equity) remain popular for their simplicity, recent EDGAR filings show a resurgence in convertible notes for several reasons: notes accrue interest (providing additional economic benefit to investors), notes have a defined maturity date (creating a forcing function for conversion or repayment), and notes establish a debtor-creditor relationship (giving investors priority in a liquidation). This template reflects current market practice by incorporating provisions that address the relative advantages of both instruments, including optional maturity conversion at the cap (a SAFE-like feature that avoids the “maturity cliff” problem).
Negative Covenant Packages
Recent convertible note term sheets increasingly include robust negative covenant packages that restrict the company from taking certain actions without investor consent. Standard restrictions now cover: incurring debt senior to the notes, declaring or paying dividends, making fundamental changes to the business, entering into related-party transactions above a de minimis threshold, and creating liens on intellectual property. These covenants, which were historically more common in venture debt than in convertible equity bridge financings, provide meaningful protection during the period between the note issuance and the next priced round—a window during which the investor has limited governance rights.
Side Letter and Extension Mechanics
As the time between seed financing and Series A has lengthened (now averaging 18–24 months, up from 12–18 months in prior years), convertible note term sheets increasingly address what happens when the note approaches maturity without a qualifying financing. Modern term sheets include pre-negotiated extension mechanics: automatic 6-month extensions upon mutual written consent, conversion to preferred stock at the cap if the company and a majority of note holders agree, and mandatory conversion if a qualifying financing occurs within a specified window after the maturity date. These provisions reduce the need for costly and time-consuming amendment negotiations when maturity approaches.
How to Use This Template
Download the .docx file and fill in the bracketed placeholders for your specific transaction. Key fields include: company name and lead investor name, total aggregate principal amount and minimum individual investment, interest rate (market range: 4%–8% simple interest), maturity period (typically 18–24 months), conversion discount percentage (typically 15%–25%), valuation cap, qualified financing threshold (typically $1 million or more), change of control repayment multiple (typically 1.5x–2x), and expense cap for investor legal fees (typically $10,000–$25,000). The term sheet is designed as a non-binding framework—only the exclusivity and expense provisions should be binding. After both parties sign the term sheet, the company’s counsel will prepare the definitive Note Purchase Agreement and Convertible Promissory Note based on these agreed terms.
Disclaimer: This template is provided for informational and educational purposes only and does not constitute legal advice. Montague Law recommends consulting with qualified legal counsel before using this or any legal document. Every transaction has unique facts and circumstances that may require modifications to this template. Use of this form does not create an attorney-client relationship with Montague Law.