How to build a due diligence findings and risk tracker for Convertible Note Financing Transactions

Build the tracker around findings that could affect the company’s authority to issue notes, financing representations, repayment exposure, or ability to deliver conversion shares. Give each finding a precise source, distinguish missing evidence from an established conflict, and assign a decision owner and resolution standard. Reconcile the proposed financing against existing debt, capitalization records, approvals, and side letters. The deliverable is a source-linked decision record showing what must change before funding, what depends on a future conversion, and what requires an expressly assigned follow-up.

When to use this workflow

Use this workflow when company counsel or an in-house team receives financing drafts, opens a diligence room, or discovers inconsistent terms across outstanding convertible instruments. It is particularly useful for rolling closings, bridge financings alongside existing debt, and investor-specific side letters.

The tracker captures exceptions and decisions; it is not a document inventory or a substitute for a closing checklist. Scope the review around the proposed representations, financing structure, and company’s material risks.

This professional workflow guide uses US practice and Delaware corporate-law examples, with an October 13, 2026 research cutoff. Other incorporation jurisdictions, securities exemptions, state notices, tax, usury, security interests, and enforceability require separate analysis. Contractual conclusions depend on actual language, governing law, facts, and deal context.

What you need

Start with a company-approved transaction summary identifying the issuer, funding sequence, proposed exemption, note economics, conversion events, and secured or subordinated status. Collect:

• The term sheet, purchase agreement, note form, disclosure schedules, side letters, and revisions.
• Charter documents, board and stockholder approvals, capitalization records, and supporting equity issuance records.
• Outstanding notes, SAFEs, credit agreements, amendments, waivers, investor rights agreements, and consents.
• Funding records, advance schedules, interest calculations, and finance’s maturity and repayment assumptions.
• Material contracts and IP ownership records relevant to representations or identified operational dependencies.

Create a document index with stable IDs, entity, execution date, version status, request reference, and access classification. Connect amendments and exhibits to their parent instrument. Identify custodians for missing records; an incomplete room should produce a targeted request, not an assumption that no restriction exists.

Use the template

The companion template is Convertible Note Financing Transactions — Diligence findings tracker. You can copy this table into your working document or spreadsheet.

Use one row per actionable issue. Cite document ID, clause, and page where available; for calculations, cite the workbook version and input and result cells. Preserve superseded evidence rather than silently replacing it.

In “Finding / confidence,” distinguish confirmed facts, evidence gaps, and provisional interpretations. “Financing effect / timing” identifies the affected event: issuance, later closing, interest payment, maturity, or conversion. Explain priority by consequence rather than color alone.

Name one accountable owner and a target tied to the relevant event. Closure proof identifies the executed consent, corrected calculation, approved revision, or documented decision. Risk acceptance records a disposition; it does not establish that a restriction ceased to apply.

Step by step

1. Define the review perimeter and decision rules

Agree which entities, instruments, representations, and periods the review covers. Distinguish present-issuance questions from those arising only on conversion. Include subsidiaries or guarantors where their documents affect the financing.

Use practical priority categories: potential funding blocker; material economic or disclosure issue; conversion dependency; or assigned follow-up. These are team classifications, not legal conclusions. Set a review cutoff and identify who can accept commercial risk, approve drafting changes, and assess legal sufficiency.

Record: A scope-reference entry and unresolved perimeter questions, with owners. Do not bury a missing subsidiary debt schedule under “documents pending.”

2. Establish the evidence baseline

Reconcile the index with finance’s debt schedule and capitalization records. Confirm whether each instrument is executed, amended, superseded, or proposed. Request missing schedules, signatures, side letters, and waivers specifically.

For advances, match amounts and dates to supporting records before calculating interest. A historical MiNK–Agenus agreement required an updated schedule of advances and payments made on the company’s behalf, including dates. That illustrates funding-ledger discipline, not general startup-note terms: the agreement involved a parent-subsidiary relationship, and the referenced note attachment is not substantively reproduced on that page. See Article I.1 of the filed agreement.

Record: Each consequential gap, the evidence reviewed, its custodian, and the conclusion that remains unavailable.

3. Test authority and conversion-share dependencies separately

Compare the charter, approvals, proposed borrowing, and contemplated conversion shares. Identify whether conversion assumes an existing class, a future preferred series, or rights still to be negotiated. Reconcile authorized shares and outstanding commitments with the model without treating the cap table as conclusive legal authority.

For Delaware corporations, § 151(g) requires a certificate of designations to be filed and become effective when class or series rights are established through board resolutions under charter-granted authority rather than already stated in the charter. It is not required for every note issuance. Section 153(a) separately addresses minimum consideration for par-value shares—not a statutory note valuation cap or discount. See DGCL §§ 151(g) and 153(a).

Record: The precise approval or share-creation question, its relevant event, and the evidence needed to resolve it.

4. Compare existing obligations against issuance and conversion

Read debt-incurrence restrictions, lien limits, subordination terms, investor consent rights, amendment thresholds, and notice mechanics together. Test borrowing separately from conversion, repayment, or a sale event. Preserve exceptions and qualifications.

A historical SEC-filed purchase-agreement form includes conflict and default representations and specified closing deliverables, including prior-noteholder consents and lender approvals. Its debt-conflict representation contains a stated material-adverse-effect qualification. These are negotiated terms in a secured transaction, not universal requirements for unsecured startup notes. See §§ 2.1–2.2 and 4.1(e)–(l).

Record: The restriction, proposed transaction feature, applicable exception, possible cure, and uncertainty over consent authority.

5. Reconcile economics and event mechanics

Compare the term sheet, purchase agreement, note, and side letters for inconsistent principal, interest, maturity, conversion thresholds, capitalization definitions, discounts, and amendment rights. Check investor-specific most-favored-nation or participation provisions where present. Link decision-relevant discrepancies to a separate calculation worksheet.

Test qualified and nonqualified financings, maturity, sale events, and default. Identify automatic versus elective treatment, accrued-interest conversion, share class, rounding, notices, and capitalization denominator. Recalculate interest using actual funding dates and the instrument’s day-count, compounding, and cash or PIK provisions. Test repayment premiums and holder election windows rather than assuming repayment at par. Finance should separately confirm liquidity assumptions.

Record: Conflicting clauses or model cells, economic consequences, the company’s preferred correction, and decision owner.

6. Turn findings into bounded actions

Choose the response: obtain evidence, seek consent, revise drafting, correct a model, make disclosure, or document a commercial decision. Do not treat disclosure as a substitute for consent without analyzing the relevant instruments.

Assign targets by dependency. A pre-funding consent needs time for review and execution. A future share-class question needs a reasoned deferral and a defined revisit trigger. Avoid turning every uncertainty into a supposed closing condition.

Record: The proposed cure, accountable owner, approving decision-maker, target event, and objective closure evidence. Split findings when actions have different owners or independent outcomes.

7. Verify disposition and hand off surviving obligations

Check resolution evidence against the original issue. Confirm that an executed waiver covers the transaction, parties, and timing, and that drafting changes survived execution. Preserve accepted-risk reasoning; risk acceptance does not replace counsel’s assessment of legal requirements.

Transfer surviving obligations to the company’s closing or post-closing work product, retaining tracker IDs. For offerings under Rules 504 or 506 or Securities Act § 4(a)(5), SEC guidance requires Form D within 15 days after the first investor becomes irrevocably contractually committed, with weekend or holiday adjustment. Do not substitute wire receipt for that trigger or apply the rule to every exemption. Analyze state notices separately. See SEC Form D guidance.

Record: Closure evidence or an accepted handoff identifying the obligation, trigger, owner, and receiving record.

Worked example

Fictional scenario: Alder Circuit, Inc., a Delaware corporation, proposes a $1.8 million unsecured convertible note financing with 7% simple interest, a 24-month maturity, and qualified-financing conversion. It has a bank facility and one earlier convertible note. All parties, documents, amounts, and provisions in this example are fictional.

The executed bank facility prohibits additional borrowing without written bank consent; counsel finds no applicable exception in the reviewed documents. The new financing drafts disagree about interest conversion. The prior-note model uses a capitalization denominator without supporting components. No bank consent or denominator support has been supplied.

A favorable bank conversation does not close F-01. The company pauses funding pending written consent or another legally reviewed path. F-02 needs a commercial instruction before redrafting because either treatment changes the conversion amount. F-03 prevents approval of the dilution model but does not establish that shares are unavailable or a charter amendment is required. These findings therefore produce different decisions rather than a single undifferentiated “high risk” label.

Common mistakes

• Recording “cap table reviewed” as a finding. Identify the discrepancy, source cells, and affected conversion assumption.
• Treating missing consent as proven breach. Separate the missing evidence from counsel’s assessment of the restriction and proposed conduct.
• Merging issuance and conversion questions. Specify the affected event so future dependencies neither disappear nor become unexplained present blockers.
• Closing on a circulated revision. Verify executed wording and linked schedules before recording resolution.
• Applying one investor’s side letter to all notes. Identify the beneficiary, covered instruments, and any interaction with amendment rights.

Final quality check

• Every material finding has a verified document, clause, page, or calculation reference.
• Facts, missing evidence, and legal interpretations are distinguishable.
• Drafts, executed versions, amendments, and missing attachments are identified.
• Conversion assumptions reconcile with note language and supporting capitalization records.
• Priority states a financing consequence and relevant event.
• Closed rows contain verified resolution evidence or documented risk disposition.
• Open rows have an accountable owner, target, and accepted follow-up destination.

Complete the workflow with DecoverAI

DecoverAI is the Legal Intelligence Platform for litigation and transactions. Its due diligence capabilities include bulk document classification to organize diligence and prioritize human review; tabular review supports work across multiple documents. In Word-based contract review, choose the represented party and provide deal-specific instructions. Findings quote and locate clauses, rank severity, and identify missing language as not present. Lawyers retain responsibility for source verification, legal conclusions, and tracker dispositions. To assess this workflow against your document set, book a demo.

Frequently asked questions

Should every reviewed document receive a tracker row?

No. Keep coverage in the index. Add rows for actionable findings, consequential evidence gaps, and decisions requiring a record. Link multiple documents when they establish one issue.

Can a conversion issue remain open at funding?

Potentially, depending on the documents and circumstances. Record why deferral is appropriate, the revisit trigger, owner, and required protections. Do not defer a present representation or approval issue merely because conversion occurs later.

How should rolling closings affect the tracker?

Identify the closing each finding affects. Recheck changed documents, new side letters, updated capitalization, and conditions requiring refresh. Do not assume an earlier waiver covers additional issuances.

Who can close a legal or economic finding?

Assign authority explicitly. Finance verifies funding and model inputs; counsel assesses legal sufficiency; an authorized company decision-maker approves commercial risk. Some rows require all three confirmations.

Sources

• Delaware General Corporation Law, §§ 151–153.
• SEC, Filing a Form D Notice.
• SEC-filed Form of Convertible Note Purchase Agreement, historical secured-transaction example.
• MiNK–Agenus Convertible Promissory Note Purchase Agreement, historical parent-subsidiary example.

This guide is general information about legal workflows, not legal advice for any matter. It was drafted and reviewed with AI assistance. The worked example is fictional. Contract rights and procedure depend on the governing law, the actual wording, and the facts, so check the cited sources and the rules that apply in your jurisdiction before relying on it.