Convertible Note Template: The Clauses That Matter and the One a Download Can't Fill In

A working convertible note template needs seven things: the parties and principal amount, an interest rate, a maturity date, a conversion trigger, a valuation cap and/or discount rate, a most-favored-nation clause, and a governing-law clause. The first six show up in almost every downloadable template on the internet. The seventh is the one that decides whether the other six are worth the page they're printed on, because it has to point to a legal system that actually recognizes debt converting into equity the way your term sheet describes it — and outside Delaware, Cayman, and a handful of other startup-friendly jurisdictions, that's not automatic.

Search "convertible note template" and you'll get PDF generators, law-firm lead-magnets, and VC open-source templates — all built for a US financing, all treating governing law as a dropdown that defaults to Delaware. None of them tell you that a fixed interest rate can make the whole instrument objectionable to a Sharia-compliant investor in Riyadh, or that some African jurisdictions have rules about what non-bank lenders can charge that a startup note might brush up against. This is the version of that template built for a founder who isn't raising from a Delaware C-corp.

What has to be in the document, functionally

Strip away the boilerplate and a convertible note is doing six jobs at once:

• Principal amount — how much the investor is putting in, and the purchase price for the note itself.
• Interest rate — the cost of the debt while it's outstanding, typically accruing rather than paid in cash.
• Maturity date — the point at which the note is technically due if no qualifying round has happened, usually 12–24 months out.
• Conversion trigger — the event that turns debt into equity, almost always a "qualified financing" above some minimum raise size, sometimes also a change of control or an optional conversion at maturity.
• Valuation cap and/or discount rate — the mechanism that rewards the note-holder for investing early. A cap sets a ceiling on the valuation used to price their conversion; a discount gives them a percentage off whatever price new investors pay. Notes often carry both, with the noteholder getting whichever is more favorable.
• Most-favored-nation (MFN) clause — a promise that if you issue a better-terms note to a later investor before this one converts, the earlier noteholder's terms upgrade to match.

That's the economic core, and it's genuinely similar everywhere — a Riyadh angel and a Lagos VC and a Jakarta family office are all pricing the same six variables. What's specific to a US-style template is everything wrapped around that core: repayment default mechanics assuming Delaware's UCC-adjacent creditor remedies, tax language written for the IRS's treatment of original issue discount, and a governing-law clause that just says "Delaware" without anyone asking whether Delaware law is the right choice for a company that isn't incorporated there.

The clause a generic template can't fill in for you

Governing law isn't a formality — it's the clause that determines which court, if any, would actually enforce the rest of the document. A note governed by Delaware law, signed by a company incorporated in Kenya or Vietnam or mainland Saudi Arabia, creates a mismatch: if the note ever goes to dispute, a local court is being asked to apply foreign law to a domestic company, which is exactly the kind of ambiguity that turns a clean cap-table event into a legal fight.

We wrote about this same fault line for SAFEs in SAFE vs Convertible Note: The Question Changes Outside the US — the instrument that works close to as-advertised in Delaware, Cayman, and common-law free zones like ADGM and DIFC can be a real enforceability risk in civil-law systems that have no statutory concept of it. Convertible notes travel better than SAFEs precisely because debt is a category every legal system recognizes. But "recognized as debt" doesn't mean "recognized on the terms a US template assumes" — interest treatment, default remedies, and creditor priority all vary, and the governing-law clause is where that variance gets decided.

The fix isn't complicated: the note should be governed by the law of wherever your company is actually incorporated, drafted by counsel licensed there, not adapted from a US PDF by swapping the state name.

Where interest itself becomes the sticking point

In most markets, a note's interest rate is a negotiation, not a legal question. In Saudi Arabia and the wider Gulf, it can be a compliance question instead. A Sharia-compliant investor cannot receive a fixed, guaranteed return on money lent — which is exactly what a conventional convertible note's interest rate is — so a standard note offered to a Sharia-sensitive angel or family office isn't just a hard sell, it's a structure they may not be able to sign regardless of how good the deal is.

The market has built workarounds rather than abandoning the instrument. OQAL, an angel network operating across Saudi Arabia and Bahrain, launched a Shariah-compliant note that keeps the debt-to-equity mechanics — initial investment structured as debt, converting to equity at a future round — while replacing the interest coupon with a structure closer to profit participation or a unilateral undertaking to transfer shares, avoiding the fixed-return element that raises the objection in the first place. If you're raising from Gulf-based investors, ask the interest-rate question before you send a term sheet, not after someone flags it in redlines.

The quieter risk: lending rules that weren't written with startups in mind

A convertible note is legally a loan, which means it can brush up against rules built for consumer or commercial lending — usury caps, licensed-moneylender requirements, interest rate ceilings — even though nobody involved thinks of a startup investment as "lending" in that sense. The details vary widely and change over time: Kenya has had statutory interest rate caps on loans at different points, Nigeria's general lending market is largely uncapped outside specific categories like Lagos State's money-lending statute, and the picture looks different again in Egypt or across Southeast Asia. None of this usually applies to an arm's-length investment note between a company and a sophisticated investor — but "usually" is a five-minute question worth putting to local counsel once, not an assumption worth carrying across every round you raise.

The convertible note clause checklist

Treat this as the list to negotiate against and hand to your lawyer, not a fill-in-the-blank form:

1. Parties, principal, and purchase price — who's investing, how much, and the note's own price (usually par).
2. Interest rate — the rate itself, whether it's simple or compounding, and whether it needs to be replaced entirely for Sharia-compliance reasons.
3. Maturity date — typically 12–24 months, plus what happens if no qualifying round has closed by then: automatic conversion at a fixed valuation, extension, or repayment.
4. Conversion trigger and qualified financing threshold — the minimum raise size that counts as a "real" round for conversion purposes, so a small bridge doesn't accidentally trigger it.
5. Valuation cap and/or discount rate, and which one controls if both apply.
6. Most-favored-nation clause, so this note isn't left behind if a better-terms note gets issued later.
7. Governing law and dispute resolution, matched to where the company is actually incorporated — not defaulted to Delaware because the template was.
8. Transfer and assignment restrictions, standard but easy to forget in a first draft.

Everything above the governing-law line is close to universal. Everything below it is local, and that's the half a copy-pasted US template silently skips.

Where Govy fits, specifically

Govy's legal template pack generates jurisdiction-aware documents for founders agreements, NDAs, SAFEs, and board and shareholder resolutions across Saudi Arabia, the UAE, US-Delaware, and the UK. It doesn't currently generate a convertible note or a CCPS agreement — that's still a document your lawyer drafts, because interest treatment, lending-law exposure, and Sharia-compliance structuring vary too much by jurisdiction for a template to safely paper over, and Govy doesn't position itself as a replacement for that judgment call.

What it does once the note is signed: model it on the cap table as SAFE and convertible note overhang, run scenario planning against your existing ownership, and show the dilution math before the priced round closes rather than after. If you're layering more than one instrument before a round, we broke down the stacking math in SAFE Note Stacking: How Multiple SAFEs Actually Dilute Founders.

Get the note drafted by someone licensed where you're incorporated, then let Govy carry the numbers from signature through the next round. See how Govy's cap table handles convertible note modeling at govy.tech.

FAQ

What are the essential clauses in a convertible note template?

Seven things make a convertible note function at all — parties and principal, interest rate, maturity date, conversion trigger, valuation cap and/or discount rate, a most-favored-nation clause, and governing law. Miss any of the first six and the economics are ambiguous. Miss the seventh and you don't know if the document is enforceable where your company is incorporated.

Is a convertible note the same everywhere, or does it change by country?

The clause list stays constant, but what fills it changes by jurisdiction. Interest rate can hit Sharia-compliance objections in Saudi Arabia and the wider Gulf, some African jurisdictions restrict what non-bank lenders can charge, and governing law has to point to a system that actually recognizes debt-to-equity conversion the way your term sheet describes it. A note that works unmodified in Delaware is a first draft everywhere else, not a finished document.

Can a convertible note be interest-free?

Yes, and in Sharia-sensitive markets it usually has to be. A conventional note's fixed interest is the specific term that Islamic finance principles object to, which is why instruments like Saudi and Bahraini angel network OQAL's Shariah-compliant note replace interest with a structure closer to profit participation or a share-transfer undertaking instead of a coupon.

What happens if a convertible note reaches its maturity date without a new round?

Technically, the note becomes due and repayable like any other debt, which is the leverage point that makes a note different from a SAFE. In practice, most maturity dates get renegotiated — extended, converted at a fixed valuation, or rolled into a bridge — because investors rarely want to force repayment out of a company they still believe in, but "rarely" isn't "never," so a maturity date without a real plan is a genuine risk, not paperwork.

Should I use a downloaded convertible note template or hire a lawyer?

Use a downloaded template to understand the clause list and negotiate the economics with your investor, then have a lawyer licensed where your company is incorporated turn it into a signable document. The clauses are the same everywhere; the wording that makes them enforceable is not, and that gap is exactly where founders outside the US get burned reusing a generic US template unmodified.