Document background
A Convertible Promissory Note is commonly used in Pakistan's growing startup and scale-up ecosystem as a bridge financing instrument. This document is particularly useful when companies need immediate funding but face challenges in establishing a definitive valuation. The note allows investors to provide capital as a loan that can later convert into equity, typically at a discount to the next financing round's valuation. The document must be structured to comply with Pakistani law, including the Companies Act 2017, securities regulations, and where applicable, foreign investment rules. It typically includes terms for conversion triggers, valuation caps, discount rates, and interest/profit calculations, while ensuring alignment with Islamic banking principles that are relevant in the Pakistani context. The Convertible Promissory Note serves as a balanced instrument that protects both investor and company interests while providing flexibility in terms of future equity conversion.
