Convertible Note Subordination Clause

Summary

This Convertible Note Subordination Clause should be inserted into a convertible note in connection with a financing transaction for a start-up company, specifically for a financing where it is anticipated that the start-up may secure more senior debt in the future (but includes alternate clauses if future senior debt is not contemplated). This clause includes practical guidance, drafting notes, alternate clauses, and optional clauses. This subordination clause provides for the subordination of payment of a convertible note's principal and interest (if any) to more senior debt (such as loans by a bank or other established financial institution). This subordination clause contemplates both existing and future debt from a financial institution. Typically, a lender will insist upon either having its own subordination language inserted into the financing documents or having the parties enter a separate subordination agreement with the lender. Nonetheless, this clause can serve as a preliminary guide for counsel to the start-up company and provide assistance in drafting the convertible note. This subordination clause can be inserted into the form Convertible Promissory Note (Mezzanine Financing). This form should be read in conjunction with the practice note Pre-seed and Seed Stage Convertible Note and Note Purchase Agreement Transactions. For a full listing of related start-up company content, see Start-Up Resource Kit