Convertible Note Agreement (Kenya)
CONVERTIBLE NOTE AGREEMENT
Companies Act No. 17 of 2015 | Law of Contract Act (Cap. 23) | Kenya
THIS CONVERTIBLE NOTE AGREEMENT (the "Note") is made on [Note Date]
BETWEEN:
(1) [Company Name] (BRS Registration Number: [Company BRS Number]; KRA PIN: [Company KRA PIN]), a private limited company incorporated under the Companies Act No. 17 of 2015, having its registered office at [Company Address] (the "Company"); and
(2) [Investor Name] (NIC/BRS: [Investor NIC/BRS]), of [Investor Address] (the "Investor").
1. LOAN AND INTEREST
1.1 Principal: The Investor agrees to lend to the Company, and the Company agrees to borrow from the Investor, the principal sum of [Principal Amount] ([Currency]) (the "Principal"), to be disbursed to the Company by bank transfer on [Disbursement Date].
1.2 Interest: Interest shall accrue on the outstanding Principal at the rate of [Interest Rate] from the date of disbursement until the date of conversion or repayment in full. Interest accrues daily on the basis of a 365-day year.
1.3 Withholding Tax: The Company shall deduct withholding tax at 15% from interest payments to the Investor and remit the same to the Kenya Revenue Authority (KRA) via the iTax platform by the 20th of the following month, in accordance with Section 35 of the Income Tax Act (Cap. 470).
1.4 Maturity: Unless earlier converted under Clause 3, the outstanding Principal and all accrued interest shall become due and payable on [Maturity Date] (the "Maturity Date").
1.5 Maturity treatment: If no Qualifying Financing Event (as defined in Clause 3) has occurred by the Maturity Date, the following shall apply: [Maturity Treatment].
2. SECURITY
2.1 The Note is: [Secured] (secured / unsecured).
2.2 Security description (if applicable): [Security Description]. Any charge created in connection with this Note must be registered with the Business Registration Service (BRS) within 21 days of creation under Section 101 of the Companies Act No. 17 of 2015.
3. CONVERSION
3.1 Qualifying Financing Event: A "Qualifying Financing Event" means the closing of an equity financing round in which the Company issues shares to investors and receives gross proceeds of not less than [Qualifying Round Amount] in a single closing or series of closings within 90 days.
3.2 Automatic Conversion: Upon the closing of a Qualifying Financing Event, the outstanding Principal and all accrued interest (the "Conversion Amount") shall automatically convert into [Share Class] of the Company at the Conversion Price.
3.3 Conversion Price: The Conversion Price per share shall be the lower of: (a) the price per share paid by investors in the Qualifying Financing Event multiplied by (1 minus the Conversion Discount of [Conversion Discount]); and (b) the price per share implied by a pre-money valuation of the Company of [Valuation Cap] (the "Valuation Cap").
3.4 Number of Shares: The number of shares issued on conversion shall be calculated as: Conversion Amount ÷ Conversion Price, rounded down to the nearest whole share. Any remainder shall be paid in cash.
3.5 Return of Allotment: Upon conversion, the Company shall file a Return of Allotment with the Business Registration Service (BRS) within 14 days under Section 389 of the Companies Act No. 17 of 2015.
3.6 Pre-emption Rights: The existing shareholders of the Company confirm that any pre-emption rights under Sections 390 to 393 of the Companies Act No. 17 of 2015 are hereby waived in respect of the shares to be issued on conversion.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Company represents and warrants to the Investor that: (a) it is duly incorporated under the Companies Act No. 17 of 2015 with BRS Registration Number [Company BRS Number]; (b) this Note has been authorised by a resolution of the Board of Directors; (c) no material litigation is pending before the High Court of Kenya or the Employment and Labour Relations Court (ELRC); (d) the Company is in compliance with all tax obligations administered by the Kenya Revenue Authority (KRA) and all NSSF and SHIF contribution requirements; and (e) the Company's most recent financial statements fairly represent its financial position.
4.2 Information Rights: The Company shall provide the Investor with: [Information Rights].
5. GOVERNING LAW AND DISPUTE RESOLUTION
5.1 This Note shall be governed by and construed in accordance with the laws of Kenya, including the Companies Act No. 17 of 2015, the Law of Contract Act (Cap. 23), and the Income Tax Act (Cap. 470).
5.2 Any dispute arising from or in connection with this Note that is not resolved by negotiation within 30 days shall be referred to arbitration at the Nairobi Centre for International Arbitration (NCIA) under the Arbitration Act No. 4 of 1995 (revised 2022), with proceedings conducted in Nairobi in the English language.
IN WITNESS WHEREOF, the Parties have signed this Convertible Note Agreement at [Governing County] on the date first written above.
Authorised Director (Company)
________________
Signature
Investor
________________
Signature
Witness
________________
Signature
What Is a Convertible Note Agreement (Kenya)?
A Convertible Note Agreement in Kenya governs the relationship between the parties by fixing what each must do.
The convertible note occupies a hybrid position between debt and equity. Before conversion, the investor holds a debt claim against the company — the company owes the investor the principal loan amount plus accrued interest. Upon the conversion trigger, the debt claim is extinguished and the investor receives newly issued ordinary or preference shares in the company. The conversion mechanism is designed to defer the valuation question to the next institutional funding round, at which point professional investors set a price per share that determines how many shares the convertible note holder receives. This approach is particularly useful in early-stage Kenyan startups where the company has insufficient operating history to support a reliable valuation.
The two primary investor-protective mechanisms in a Kenya Convertible Note are the valuation cap and the conversion discount. A valuation cap sets a maximum company valuation at which the noteholder's loan converts to equity — if the qualifying financing round values the company above the cap, the noteholder converts at the cap valuation, receiving more shares than investors paying the round price. A conversion discount (typically 15% to 25%) allows the noteholder to purchase shares at a price below the price paid by new investors in the qualifying round, compensating for the earlier investment risk.
Under the Companies Act No. 17 of 2015, the issuance of new shares upon conversion of the convertible note requires a board resolution and, in some cases, a shareholder resolution authorising the allotment, consistent with the pre-emption rights provisions in Sections 390 to 393 of the Act. The company must file a return of allotment with the Business Registration Service (BRS) via the eCitizen portal within 14 days of the share allotment under Section 389 of the Companies Act. Where the company's constitution restricts the allotment of shares or contains pre-emption rights in favour of existing shareholders, those provisions must be addressed before conversion can occur.
The Capital Markets Authority (CMA) under the Capital Markets Act (Cap. 485A) regulates public offers of securities in Kenya. A convertible note issued by a private company to a sophisticated investor in a private placement is generally not a public offer and does not require CMA approval. However, companies considering a public listing on the Nairobi Securities Exchange (NSE) after a convertible note financing should confirm that the note's terms are compatible with CMA's prospectus and disclosure requirements.
The Kenya Revenue Authority (KRA) treats interest accruing on a convertible note as income of the investor subject to withholding tax under Section 35 of the Income Tax Act (Cap. 470). The applicable withholding tax rate on interest paid to a Kenyan resident investor is 15%, or 15% for non-residents unless a lower rate applies under a double tax treaty (for example, the Kenya-Mauritius Double Taxation Agreement reduces withholding tax on interest to 10%). The company, as the paying agent, must deduct and remit withholding tax to KRA by the 20th of the following month via the iTax platform.
When Do You Need a Convertible Note Agreement (Kenya)?
A Kenya Convertible Note Agreement is required in the following specific circumstances in the early-stage startup and investment ecosystem.
A Convertible Note Agreement is required when a Kenyan startup at pre-seed or seed stage needs bridge financing to fund operations for 12 to 24 months while it develops its product and customer base, but the founders and investors cannot agree on a company valuation — the convertible note defers the valuation to the next institutional funding round, reducing negotiation friction.
A Convertible Note Agreement is needed when a sophisticated angel investor registered with the Kenya Private Sector Alliance (KEPSA) or the East Africa Business Council (EABC) wishes to provide capital to a startup in exchange for a right to participate in the next equity round on favourable terms, without the formality and cost of a full shareholders' agreement and share subscription agreement required for an equity round.
A Convertible Note Agreement is required when a startup incubated at a Kenyan innovation hub — such as iHub Nairobi, Nailab, or C4DLab at the University of Nairobi — is raising its first external capital and needs a standardised instrument that local investors and legal advisers recognise as market-standard in the East African ecosystem.
A Convertible Note Agreement is needed when a company registered with the Business Registration Service (BRS) as a private limited company under the Companies Act No. 17 of 2015 has received a term sheet from a Kenyan or international impact investor and the investor proposes to use a convertible note structure consistent with instruments used by development finance institutions (DFIs) such as the African Development Bank (AfDB) Group facilities.
A Convertible Note Agreement is required when a startup that has previously bootstrapped needs capital to bridge to a Series A round led by a foreign venture capital fund, and the convertible note allows the offshore fund to invest without triggering the Capital Markets Authority (CMA) approval process that would apply to a direct equity investment structured as a public offer.
A Convertible Note Agreement is needed when the Kenya National Innovation Agency (KeNIA) or a county government innovation fund provides repayable grant capital to a technology startup on terms that include conversion to equity if the startup reaches specified growth milestones, formalising the public sector's participation in the startup's cap table.
Under the Central Bank of Kenya Act (Cap. 491), the Central Bank of Kenya (CBK) regulates banking. The Capital Markets Authority (CMA) regulates securities under the Capital Markets Act (Cap. 485A). Section 84 of the Bills of Exchange Act (Cap. 27) governs promissory notes. The Kenya Revenue Authority (KRA) administers tax obligations. The Microfinance Act No. 19 of 2006 regulates microfinance institutions. The Hire Purchase Act (Cap. 507) governs credit sale agreements.
What to Include in Your Convertible Note Agreement (Kenya)
A Kenya Convertible Note Agreement under the Companies Act No. 17 of 2015 and the Law of Contract Act (Cap. 23) must include the following essential provisions.
Parties: Full legal names of the investor (noteholder) and the company (issuer), with the company's BRS Registration Number, KRA PIN, and registered address, and the investor's National Identity Card (NIC) number or company registration details. The note should confirm that the company is a private limited company incorporated under the Companies Act No. 17 of 2015.
Principal Amount and Disbursement: The loan amount in Kenya Shillings (KES) or US Dollars (USD), the disbursement date and mechanism (bank transfer to the company's KCB, Equity Bank, or Cooperative Bank account), and any conditions precedent to disbursement — for example, delivery of a board resolution authorising the note.
Interest Rate: The annual interest rate (simple or compound), whether interest accrues and is added to the conversion amount or is payable in cash on conversion or maturity. Common rates in the Kenyan market range from 5% to 15% per annum. Withholding tax at 15% under Section 35 of the Income Tax Act (Cap. 470) applies to interest payments to Kenyan resident investors, and the note should specify whether the stated rate is gross or net of withholding tax.
Conversion Mechanics: (1) Qualifying Financing Event: the minimum funding round amount (for example, KES 50 million or USD 500,000 raised from one or more investors) that triggers automatic conversion; (2) Conversion Price: the price per share at which the note converts — calculated as the lower of the valuation cap price or the qualifying round price less the discount rate; (3) Valuation Cap: the maximum pre-money valuation at which the note converts — for example, KES 200 million or USD 2 million; (4) Conversion Discount: typically 15% to 25% off the qualifying round price per share; (5) Optional Conversion: the investor's right to convert voluntarily if no qualifying financing event has occurred by the maturity date.
Maturity Date and Repayment: The date on which the note matures — typically 18 to 24 months from issuance. The note should state whether at maturity, if no conversion has occurred, the principal and accrued interest are: (a) repayable in cash; (b) automatically convertible at the most recently agreed valuation; or (c) convertible at the investor's option at a specified price. An obligation to repay cash at maturity creates a liquidity risk for early-stage companies.
Pre-emption Rights and Anti-Dilution: Whether the investor holds pre-emption rights on future share issuances under Sections 390 to 393 of the Companies Act No. 17 of 2015, and whether broad-based weighted-average anti-dilution protection applies if the company issues shares at a price below the conversion price before conversion.
Representations and Warranties: The company's representations that: (a) it is duly incorporated under the Companies Act No. 17 of 2015 with the BRS; (b) the note has been duly authorised by a board resolution; (c) no material litigation is pending before the High Court of Kenya or the ELRC; (d) the company's financial statements fairly represent its financial position; and (e) the company is compliant with KRA tax obligations and NSSF and SHIF contribution requirements.
Governing Law and Dispute Resolution: The note is governed by the laws of Kenya, with disputes referred to arbitration at the Nairobi Centre for International Arbitration (NCIA) under the Arbitration Act No. 4 of 1995 (revised 2022), or to the High Court of Kenya (Commercial Division). Forms-legal.com provides this Kenya Convertible Note Agreement as a market-standard starting template — companies and investors should engage an Advocate of the High Court of Kenya with corporate finance experience before finalising convertible note terms.
Under the Central Bank of Kenya Act (Cap. 491), the Central Bank of Kenya (CBK) regulates banking. The Capital Markets Authority (CMA) regulates securities under the Capital Markets Act (Cap. 485A). Section 84 of the Bills of Exchange Act (Cap. 27) governs promissory notes. The Kenya Revenue Authority (KRA) administers tax obligations. The Microfinance Act No. 19 of 2006 regulates microfinance institutions. The Hire Purchase Act (Cap. 507) governs credit sale agreements.
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Frequently Asked Questions
Yes. A Convertible Note Agreement is legally binding in Kenya under the Law of Contract Act (Cap. 23), provided the standard requirements for contract formation are met: offer and acceptance, consideration (the loan amount disbursed by the investor), intention to create legal relations, and certainty of terms. The agreement must be in writing and signed by both the investor and an authorised director of the company — a board resolution authorising the signing of the note should be passed under the Companies Act No. 17 of 2015. The convertible note operates as both a loan agreement (creating a debt obligation before conversion) and a subscription right (creating a contractual right to receive shares on conversion). Both aspects are enforceable by the High Court of Kenya (Commercial Division). If the company becomes insolvent before conversion, the convertible noteholder is an unsecured creditor ranking after secured creditors but before equity shareholders. The Insolvency Act No. 18 of 2015 governs the priority of claims in a Kenyan company insolvency, and convertible noteholders should understand that their investment is at risk if the company is wound up before the qualifying financing event occurs.
A Convertible Note issued by a private limited company to a specific investor in a private placement does not generally require approval from the Capital Markets Authority (CMA) under the Capital Markets Act (Cap. 485A). The CMA's approval and prospectus requirements apply to public offers of securities — invitations to the public at large to subscribe for shares, debentures, or other securities. A convertible note issued to one investor or a small group of sophisticated investors (angel investors, venture capital funds, development finance institutions) in a private negotiation is not a public offer and falls outside the CMA's prospectus requirements. However, if the convertible note is structured as a debenture — a debt instrument secured by a charge over the company's assets — the debenture must be registered with the Business Registration Service (BRS) under Section 101 of the Companies Act No. 17 of 2015 within 21 days of creation. Failure to register a debenture within the prescribed period renders the charge void against a liquidator and other creditors. Companies considering a future listing on the Nairobi Securities Exchange (NSE) should confirm with an Advocate experienced in capital markets law that the convertible note terms are compatible with NSE Listing Rules.
The Kenya Revenue Authority (KRA) treats different aspects of a convertible note differently under the Income Tax Act (Cap. 470). Interest accruing on the note is income of the investor subject to withholding tax at 15% for Kenyan resident individuals and companies under Section 35 of the Income Tax Act, deducted and remitted by the company by the 20th of the following month via the iTax platform. For non-resident investors, the withholding tax rate is 15% unless reduced by a double tax agreement — for example, the Kenya-Mauritius Double Taxation Agreement provides a 10% rate on interest. Capital gains arising on the investor's disposal of shares received upon conversion are subject to Capital Gains Tax at 15% under the Capital Gains Tax provisions of the Income Tax Act (Cap. 470) as amended by the Finance Act 2023, calculated on the gain above the original cost (which is deemed to be the principal loan amount plus any accrued interest converted). Stamp duty under the Stamp Duty Act (Cap. 480) at the applicable rate may apply on the convertible note instrument, and stamp duty at 1% of the consideration applies on the allotment of shares on conversion under the transfer provisions of the Stamp Duty Act. Companies should obtain a KRA ruling or professional tax advice on their specific convertible note structure.
If a Kenyan startup fails to raise a qualifying financing round before the maturity date of the convertible note, the note's maturity provisions determine the investor's options. Most convertible notes provide for one or more of the following outcomes: (1) Cash repayment — the company repays the principal and accrued interest in cash. For an early-stage startup, this creates a liquidity risk, as the company may not have sufficient cash to repay. (2) Voluntary conversion — the investor has the option to convert the note into equity at a pre-agreed price (for example, a floor valuation specified in the note), receiving shares without a new qualifying round having occurred. (3) Extension by mutual agreement — the parties execute an extension notice under the Law of Contract Act (Cap. 23) to extend the note's maturity by a further period to allow the company additional time to close a qualifying round. (4) Default — if the company cannot repay and the parties cannot agree on conversion or extension, the investor may pursue a debt recovery claim before the High Court of Kenya (Commercial Division) or initiate insolvency proceedings under the Insolvency Act No. 18 of 2015. Most investor-friendly convertible notes include a right for the investor to convert at any time after maturity in lieu of cash repayment, protecting the investor's equity upside even if the timeline is delayed.
A Convertible Note and a SAFE (Simple Agreement for Future Equity) are both early-stage investment instruments used in the Kenyan startup ecosystem, but they have important legal and structural differences. A Convertible Note is a debt instrument — it creates a borrower-creditor relationship, carries an interest rate, and has a maturity date by which the loan must be repaid or converted. A SAFE, developed by Y Combinator in the United States, is not a debt instrument — it has no interest rate and no maturity date, and the investor receives the right to future equity without the company incurring a debt obligation. In Kenya, SAFEs are used by startups familiar with Silicon Valley practice but their enforceability has not been extensively tested before the High Court of Kenya. The Law of Contract Act (Cap. 23) principles of offer, acceptance, consideration, and certainty apply to both instruments. A SAFE's lack of a maturity date and interest provision may raise questions about consideration adequacy in Kenya. Convertible Notes are more familiar to Kenyan lawyers, auditors, and the Companies Registry, and the BRS's accounting treatment of convertible notes as debt (before conversion) is more settled than the accounting treatment of SAFEs. Both instruments require a board resolution under the Companies Act No. 17 of 2015 and a return of allotment on conversion.
This template is provided for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Consult a qualified attorney for advice specific to your situation.Full disclaimer
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