How to compare material contracts in a diligence table for Convertible Note Financing Transactions

Compare material contracts against the proposed note financing, not just against one another. Build a source-linked table separating restrictions on issuing debt, granting liens, converting notes, and completing a later sale. Preserve exceptions, consent thresholds, notice mechanics, and missing evidence. Assign a company decision owner and identify the evidence needed to resolve each issue. The deliverable is a comparison showing which provisions appear compatible with the proposed structure, which remain uncertain, and which call for consent, disclosure, or revised financing terms.

When to use this workflow

Use this workflow when company counsel or an in-house team receives a convertible note term sheet, prepares purchase-agreement disclosures, or evaluates existing obligations before a further closing. Begin before finalizing representations or committing to a consent timetable.

Review prior notes, SAFEs, credit facilities, investor side letters, stockholder agreements, and commercial contracts with provisions potentially affecting issuance or conversion. Include important IP licenses and customer contracts where ownership-change or termination provisions could affect the financing decision.

This is a US company-side workflow, with Delaware corporate-law points identified separately. Conclusions depend on actual language, governing law, facts, and deal structure. The table supports, but does not replace, separate securities, tax, security-interest, and enforceability analysis. The process recommendations below are not independent legal requirements.

What you need

Collect the proposed term sheet, purchase agreement, note form, side letters, and any security or subordination documents. Identify the maximum financing amount, closing sequence, repayment terms, and automatic or elective conversion triggers.

Request existing contracts with amendments, schedules, exhibits, waivers, and consents. Include prior financing instruments, investor rights, key licenses, and material commercial relationships. Obtain charter documents, capitalization records, and approval records relevant to conversion assumptions.

Ask finance for outstanding debt, commitments, and existing basket usage. Ask business custodians about termination notices, alleged defaults, and undocumented modifications. Their answers guide follow-up but do not replace documentary evidence.

Maintain an index identifying each document’s contracting entity, execution status, version, and related instruments. Assign stable IDs so table citations survive changes to data-room folders.

Use the template

The companion template is Convertible Note Financing Transactions — Material contracts comparison. Copy this table into your working document or spreadsheet. Use one row per restriction or issue, not one compressed summary per agreement.

“Source / evidence” identifies the clause, page, and controlling amendment. “Trigger tested” distinguishes issuance, a later closing, conversion, repayment, or sale. “Restriction / exception” preserves defined terms, qualifications, and approval thresholds.

In “Financing effect / status,” distinguish confirmed wording, missing evidence, and counsel’s assessment. Include a priority: closing blocker, structure decision, or follow-up. The action field should identify both the decision owner and any person responsible for obtaining evidence. Use an actual target date once the closing timetable is known.

The final column identifies the executed consent, verified calculation, or other resolution evidence—not merely “done.” Reference related rows by ID where restrictions interact. Keep the broader document inventory separate.

Step by step

1. Define the financing events being tested

Prepare a transaction assumptions sheet identifying issuer, principal, maximum commitments, collateral, closing sequence, maturity, conversion triggers, and expected conversion shares. Identify unresolved terms rather than silently selecting an interpretation.

Test issuance separately from conversion. For each reviewed provision, ask whether it addresses borrowing, equity issuance, a specified investor’s ownership, or a defined control event. Include repayment restrictions if the proposed note permits or requires cash payment.

Record: Enter the event and assumptions-sheet version in each row. State which unresolved financing alternatives could change the assessment.

2. Select contracts by financing relevance

Use the proposed representations and financing structure to determine scope. Do not use annual spend alone: inspect a small prior note for approval rights as carefully as a large supply agreement.

An SEC-filed convertible note purchase-agreement form, §§ 2.1–2.2, illustrates negotiated representations concerning agreement conflicts and existing material-contract defaults. Section 2.1’s agreement-conflict representation includes a material-adverse-effect qualification; do not transfer that qualification indiscriminately to other representations. This public-company example supplies wording to examine, not a universal diligence threshold.

Record: Identify selected contracts and contracting entities. Create evidence-gap rows for potentially relevant documents not received, assigning a custodian and request target.

3. Verify the operative document set

Match each agreement to amendments, restatements, schedules, accessions, and waivers. Confirm the bound entity and whether the provision extends to subsidiaries or affiliates. Separate executed instruments from drafts.

Trace definitions and cross-references before summarizing a covenant. If “permitted indebtedness” depends on a missing schedule, leave the capacity assessment open. Check whether an earlier waiver covers only a named issuance, a particular amount, or a limited period.

Record: Cite the controlling clause and amendment together. Identify missing attachments explicitly; do not fill the gap with language from another agreement or an earlier draft.

4. Extract restrictions without losing qualifications

Compare debt-incurrence limits, lien restrictions, conversion-related approvals, ownership-change provisions, termination rights, and notice mechanics. Examine relevant default and cross-default provisions for connections between the proposed financing and existing obligations.

For each consent or notice, identify the beneficiary, authorized approver, threshold, required form, and timing trigger. Distinguish advance consent from post-event notice. Preserve exceptions instead of reducing every provision to “consent required.”

Where review identifies no relevant restriction, state the reviewed scope. “No restriction identified in the reviewed agreement and amendments” is more precise than an unqualified “financing permitted.”

Record: Put operative wording and pinpoint citations in the restriction field. Record unresolved definitions and factual dependencies separately in status.

5. Test the proposed financing against each restriction

Compare borrowing capacity with the measure actually used: outstanding principal, commitments, aggregate indebtedness, or another defined amount. Obtain finance confirmation of inputs. Do not automatically compare the basket with cash received or subtract unrelated secured debt from an unsecured-debt basket.

For conversion, identify the relevant share issuance, holder percentage, or control definition. Test principal and accrued interest if both convert. Label capitalization assumptions and identify who supplied them.

Keep corporate authorization separate from contractual permission. For Delaware corporations, DGCL § 151(g) requires an effective certificate of designations when the specified stock rights are established through board resolutions under charter-granted authority rather than stated in the charter. This conditional procedure does not apply to every note issuance or conversion.

Record: State the tested amount or ownership assumption, its source, the assessment, and any separate authorization dependency.

6. Choose a company response for each issue

Separate confirmed restrictions, incomplete evidence, and disputed interpretations. Select a response: request documents, obtain consent, revise note terms, negotiate a representation qualification, prepare disclosure, or escalate a decision. Do not record disclosure as curing an underlying covenant breach without analyzing the relevant instruments.

The SEC-filed form, § 4.1(e)–(l), includes specified noteholder consents, intercreditor arrangements, lender approvals, and subordination documentation. These are negotiated conditions in a secured, subordinated transaction—not deliverables automatically appropriate for unsecured startup notes.

Record: Assign the response, company decision owner, target tied to the financing sequence, and proof required for resolution. Separate third-party contractual consent from any investor waiver of a financing condition.

7. Reconcile and circulate the comparison

Check the table against current purchase-agreement, note, security-document, and side-letter drafts. Revisit affected rows when principal, collateral, conversion mechanics, or closing sequence changes.

Circulate blockers first, then structure choices and evidence requests. Preserve the source-linked working table behind any executive summary. Mark an assessment superseded when its assumptions change rather than leaving inconsistent conclusions in circulation.

Record: Update status and resolution evidence. Leave unresolved issues assigned to a named person with a decision point and identify the financing event dependent on resolution.

Worked example

Fictional scenario: Alderwick Robotics, Inc., a Delaware corporation, proposes $2.4 million of unsecured convertible notes: $1.4 million initially and $1 million later. The draft provides automatic conversion at a defined equity financing. Existing obligations include a $700,000 secured equipment loan, a software license, and an investor side letter. All parties, documents, amounts, and clauses below are fictional.

The equipment agreement permits additional unsecured indebtedness up to $2 million outstanding in aggregate. The proposed notes would remain outstanding through the second closing. Finance has not confirmed other basket usage. The license’s ownership-change provision depends on missing Schedule C. The side letter requires the named investor’s written consent before new convertible debt is issued; an email says only that the investor supports exploring the financing.

The table changes the financing discussion. The $700,000 secured loan is not automatically usage of the unsecured-debt basket. Even with no other usage, however, $2.4 million outstanding exceeds the stated limit by $400,000. Splitting funding does not solve that aggregate restriction; the first closing also needs a confirmed capacity calculation.

The missing license schedule establishes uncertainty, not a consent requirement. Conversion exposure remains an open issue for counsel to assess against the proposed representations. The side-letter email provides evidence of interest, but its described wording does not approve issuance. These rows therefore require different responses: capacity analysis and restructuring or waiver, document retrieval, and operative consent.

Common mistakes

• Reviewing titles rather than the complete relationship. Include side letters, amendments, and incorporated provisions before clearing issuance.
• Combining issuance and conversion. Use separate rows when different triggers or approvals apply.
• Measuring the wrong basket. Preserve definitions and obtain finance-confirmed usage before reporting capacity.
• Treating missing evidence as permission. Distinguish an incomplete document set from a completed review finding no relevant restriction.
• Closing on assurances or disclosure alone. Check the required consent or waiver, its scope, and whether the proposed disclosure addresses only the financing representation.

Final quality check

• Each selected contract has an entity, stable ID, and verified version.
• Findings cite controlling clauses, amendments, and incorporated definitions.
• Issuance, subsequent closings, conversion, repayment, and sale remain distinguishable.
• Capacity and ownership inputs have sources and explicit assumptions.
• Exceptions, approval thresholds, and notice mechanics survive summarization.
• Missing evidence is not presented as a favorable conclusion.
• Open issues have owners and decision points; resolved rows identify proof.
• The comparison matches current financing drafts and proposed representations.

Complete the workflow with DecoverAI

DecoverAI is the Legal Intelligence Platform for litigation and transactions. Use its due diligence capabilities to organize materials through bulk classification and prioritize human review; tabular review supports work across multiple documents. In contract review, company-side, deal-specific instructions can focus findings on financing restrictions. Findings quote clauses, identify locations, rank severity, and flag missing language as not present. Lawyers verify completeness and interpretation and maintain the comparison as their work product. Book a demo to discuss this workflow.

Frequently asked questions

Should every material contract receive a row?

Give each in-scope contract a documented review status. Create separate rows for distinct issues. Keep selection reasoning and excluded documents in the inventory so the comparison remains decision-focused without losing coverage.

How should SAFEs and earlier notes be compared?

Extract actual consent, amendment, conversion, priority, and side-letter provisions. Preserve instrument-specific thresholds and holder rights. Similar document labels do not establish identical wording or approval requirements.

Can the table establish that conversion shares are authorized?

Not by itself. Reference charter and approval records and assign any authorization gap separately. Contractual permission to convert does not answer whether the resulting shares have been properly authorized.

What changes for multiple closings?

Test individual issuances and aggregate exposure. Check whether consents cover all closings, amounts, and relevant terms. Refresh affected rows for new debt, changed documents, expired approvals, and conditions limited to the initial closing.

Sources

• Delaware General Corporation Law, § 151(g) — conditional certificate-of-designations requirements.
• SEC-filed Form of Convertible Note Purchase Agreement, §§ 2.1–2.2 and 4.1 — historical negotiated representations and closing conditions, not market benchmarks.

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.