Convertible Note Agreement (Ireland)

A Convertible Note Agreement in Ireland governs the relationship between shareholders and the company and the terms on which equity is held, issued, or transferred, as regulated by the Companies Act 2014.

Convertible notes in Ireland are governed by the general law of contract and the Companies Act 2014. The Companies Act 2014, which came into force on 1 June 2015, is the principal statute governing companies in Ireland and contains the corporate law framework applicable to the issuance of convertible notes, including the rules on the allotment of shares (sections 69-77), the prohibition on shares being issued at a discount to nominal value (section 71), and the requirements for shareholder approval of allotments in certain circumstances. The note itself is a loan agreement and is subject to the general law of contract — including the Consumer Credit Act 1995 (if the lender is a moneylender), the Statute of Limitations Act 1957 (setting the limitation period for enforcement), and the Courts Act 1981 (statutory interest rate on judgment debts).

The key economic terms of an Irish convertible note are the principal amount (the amount lent), the interest rate (typically 6-10% per annum, simple, accruing and rolling into the principal), the maturity date (typically 12 to 24 months from the date of the note), the conversion trigger (typically a 'Qualified Financing' — a future equity round raising a minimum amount), the conversion discount (typically 10-25% below the price per share in the Qualified Financing), the valuation cap (the maximum pre-money valuation at which the note converts, protecting the investor from excessive dilution if the company's valuation increases significantly), and the maturity conversion rights (what happens if no Qualified Financing occurs before the maturity date).

From a tax perspective, the convertible note creates both a loan instrument (subject to rules on deductibility of interest for the company and taxability of interest for the investor under the Taxes Consolidation Act 1997) and, on conversion, an equity investment (subject to Capital Gains Tax rules on the investor's subsequent disposal of the shares). The interaction between the debt phase and the equity conversion phase creates significant tax planning opportunities and risks, and Irish tax advice is essential before implementing a convertible note structure.

Convertible notes are also subject to the financial services regulatory framework in Ireland to the extent that they are offered to investors other than professional or sophisticated investors. The offering of convertible notes to more than 150 investors or to retail investors in a public offering may require a prospectus under the Prospectus Regulation (EU) 2017/1129 and may require the issuer to be authorised by the Central Bank of Ireland. For private placements to sophisticated investors (such as angel investors and venture capital funds), these requirements typically do not apply, but legal advice should be obtained to confirm the regulatory position before issuing any convertible notes.

An Irish Convertible Note Agreement is needed in the following principal circumstances.

Pre-seed and seed investment: The most common use case for convertible notes in Ireland is pre-seed and seed investment in early-stage start-up companies that have not yet established a credible valuation. At the pre-seed stage, the company may have a founding team and an idea or early-stage product, but insufficient revenue or market traction to justify a priced equity round. A convertible note allows the investor to provide early-stage capital quickly, with the valuation deferred to a later point when the company has more financial history. The simplicity and low cost of convertible note documentation (compared to a full priced equity round with investors' rights agreement, term sheet, and subscription agreement) is a significant advantage at the pre-seed stage.

Bridge financing: Convertible notes are frequently used as bridge financing instruments, providing a company with short-term capital to bridge to its next equity financing round. For example, if a company is expected to close a Series A round in six months but needs cash immediately, a bridge note from existing investors (or new investors) allows the company to continue operating while the Series A is being negotiated. Bridge notes typically convert into the Series A shares at a discount.

Angel investment: Individual angel investors in Ireland frequently use convertible notes (or similar instruments) to make early-stage investments in companies they are backing, without the complexity and cost of a full priced equity round. The Enterprise Ireland HPSU programme and some angel networks have standardised convertible note templates that are widely used in the Irish market.

Strategic investor participation: Where a strategic investor (such as a corporate partner or customer) wishes to make a minority investment in a start-up company without immediately taking an equity stake, a convertible note provides a mechanism for the investment to be made in advance of a formal equity round, with the note converting into equity at the time of the next financing event.

Founder bridge loans: In some cases, founders of Irish start-up companies provide short-term bridge loans to their own company to fund operations between funding rounds. These loans may be structured as convertible notes, converting into equity at the next round on the same terms as external investors. However, care must be taken to comply with the Companies Act 2014 rules on directors' loans and related party transactions, and tax advice should be obtained on the treatment of interest and conversion.

Government and accelerator programmes: Some Irish accelerator and incubator programmes provide initial funding to start-ups through convertible note instruments. The participating companies should carefully review the terms of any programme convertible note before accepting it, particularly the valuation cap, conversion terms, and any information rights or governance rights granted to the programme operator.

Under the Central Bank Act 1971 and Central Bank (Supervision and Enforcement) Act 2013, the Central Bank of Ireland regulates financial agreements. Section 149 of the Consumer Credit Act 1995 governs personal credit. Revenue Commissioners apply stamp duty under the Stamp Duties Consolidation Act 1999. The Data Protection Act 2018 and GDPR Article 6 apply to personal financial data. The High Court of Ireland adjudicates financial disputes.

A thorough Irish Convertible Note Agreement should include the following key provisions to be legally effective, commercially fair, and enforceable.

Parties: The agreement must identify the company (issuer) by its full registered name, CRO number, and registered office, and must identify the investor (noteholder) by full name and address. Where there are multiple noteholders participating in a note round, each noteholder should enter into a separate note agreement or a single omnibus agreement should be used with a schedule identifying each noteholder and their investment amount.

Principal amount: The principal amount of the note (the sum advanced by the investor) must be clearly stated in EUR. The date of advance and the method of payment (bank transfer to a specified IBAN) should be confirmed.

Interest rate: The interest rate payable on the outstanding principal must be stated. For Irish convertible notes, a rate of 6-10% per annum (simple, not compound) is standard. The interest should accrue daily from the date of advance, and the agreement should specify whether accrued interest rolls into the principal for conversion purposes (which is the typical structure).

Maturity date: The maturity date (typically 12-24 months from the date of the note) must be stated. The agreement should clearly specify what happens at maturity — the options are: mandatory conversion at a specified price; optional conversion at the noteholder's election; repayment in cash; or a combination (for example, the noteholder may elect to convert at the cap valuation or demand repayment).

Conversion trigger (Qualified Financing): The agreement must define the Qualified Financing that triggers automatic conversion — specifying the minimum amount that must be raised (for example, EUR 500,000 or EUR 1 million in a single round from investors who are not existing shareholders). The mechanics of conversion (including the formula for calculating the conversion price) must be set out in detail.

Valuation cap: The pre-money valuation cap must be stated. The agreement should specify how the cap is used to calculate the conversion price — typically, the conversion price is the lower of (a) the capped price per share (cap divided by the fully diluted pre-money share count) and (b) the discounted price per share (price per share in the Qualified Financing multiplied by (1 minus the discount rate)).

Discount rate: The discount rate (percentage below the Qualified Financing price at which the note converts) must be stated — typically 15-25%.

Pre-emptive rights waiver and allotment authority: The agreement should confirm that, on conversion, the company will allot shares to the noteholder free from the pre-emption rights of existing shareholders (which must be disapplied by shareholder resolution in advance, or waived by the existing shareholders) and that the directors have authority to allot shares under section 69 of the Companies Act 2014.

Representations and warranties: The company should represent that it is duly incorporated and in good standing, that it has authority to enter into the note and to allot shares on conversion, that the information provided to the investor is true and complete, and that there are no material undisclosed liabilities or legal proceedings.

Information rights: The note should specify any ongoing information rights granted to the noteholder — for example, the right to receive quarterly management accounts and an annual audited financial report.

Governing law: The agreement should specify Irish law as the governing law and the Irish courts as the jurisdiction for disputes. The forms-legal.com Convertible Note Agreement (Ireland) template covers the mandatory elements under Consumer Credit Act 1995.