Who can amend a convertible note or SAFE?
Takeaway: Amending a convertible note or SAFE requires the consent of the company and, depending on how the note/SAFE is drafted, either the holder of that note/SAFE or some pre-agreed threshold of investors (usually a majority in interest of the holders of notes/SAFEs). Majority in interest refers to a majority of the aggregate principal of the notes/SAFEs.
Convertible promissory notes and Simple Agreements for Future Equity (SAFEs) are popular financing instruments for startups, allowing them to raise funds while providing flexibility and potential returns for both founders and investors. Given the dynamic nature of startup businesses, there are some situations where amendments to these financing agreements become necessary. For example, startups often amend convertible notes when the maturity date is approaching to push out the maturity date further in the future. In this post, we will explore who has the authority to amend a convertible promissory note or a SAFE and the key considerations for startups and investors when negotiating and amending these agreements.
Authority to Amend a Convertible Promissory Note or SAFE
Amending a convertible promissory note or a SAFE typically requires the consent of the parties involved in the agreement. This is typically the startup and the investor. The amendment process and the required approvals may vary depending on the specific terms and conditions of the convertible note/SAFE. In general, the amendment process may involve the following parties:
The Startup: The startup is one of the primary parties to the financing agreement and typically has the authority to propose amendments to the convertible promissory note or SAFE. However, the startup cannot unilaterally amend the agreement without obtaining the required consent from the investor(s).
The Investor(s): The investor(s) also hold significant power in the amendment process, as their consent is typically required to approve any proposed changes to the financing instrument. Depending on the terms of the agreement, the consent may be required from a majority or a specified percentage of the investors, or in some cases, each individual investor.
Key Considerations for Startups and Investors
When considering amendments to a convertible promissory note or a SAFE, both startups and investors should take into account the following factors:
Materiality of Amendments: Amendments should typically address material changes or issues that significantly impact the parties' rights, obligations, or the overall functioning of the financing agreement. Minor or non-material changes may not warrant the complexity and potential risks associated with the amendment process.
Consent: Amendments often require a majority of the convertible notes or SAFEs held by the investors. Depending on their investor base, startups may need to be strategic about which investors they approach to sign the amendment.
Legal and Regulatory Compliance: Any proposed amendments should be carefully reviewed by legal counsel to ensure that they comply with applicable laws and regulations, as well as the specific terms and conditions of the financing agreement.
Documentation: Proper documentation of the amendment process and the agreed-upon changes is essential to avoid potential disputes or misunderstandings in the future. This may involve drafting and executing an amendment agreement or a written consent, depending on the specific requirements of the financing instrument and the governing law.
Amending a convertible promissory note or a SAFE usually requires the consent and cooperation of both the startup and the investor(s). Understanding the amendment process and the roles and responsibilities of the various parties involved is crucial to ensure a smooth and successful outcome. Startups and investors should approach the amendment process with a collaborative mindset, focusing on the best interests of all parties and the long-term success of the startup venture.
When negotiating and implementing amendments, it's essential for both startups and investors to engage experienced legal counsel to navigate the complexities of the process and ensure compliance with all relevant laws and regulations. Proper documentation and clear communication throughout the amendment process can help to minimize potential disputes and maintain a strong financing relationship between the parties.
Conclusion
The authority to amend a convertible promissory note or a SAFE rests with the startup and the investor(s), with both parties needing to provide their consent for any changes to be made. By understanding the amendment process, the roles of the various parties, and the key considerations involved, startups and investors can effectively manage and adapt their financing agreements to accommodate the evolving needs and circumstances of their business.