The Convertible Note: a Georgian Construction
A convertible note is assembled from parts of the Civil Code: the loan contract (623), the agreed interest (625), the conditional transaction with a positive condition (90, 93), the resolutory condition (97) and the right of redemption (509). The United States SAFE instrument — with its valuation cap and absence of a debt layer — has no Georgian statutory form: the local instrument is a loan whose conversion operates as a civil-law condition. The precision of the condition decides its enforceability.
The issuance of shares or participating interests upon conversion is regulated by the current law on entrepreneurs — a separate layer that must be planned in the document in advance. Planning is reflected in the completeness of the document.
The Loan Layer
Under Article 623, the lender transfers money into the borrower’s ownership, and the borrower undertakes to return things of the same kind, quality and quantity. Article 625 leaves interest to agreement but sets a ceiling: the annual effective interest rate must not exceed 50 percent, and this requirement applies to every type of loan.
The currency rule is the same as for other loans: a loan of up to 200 000 lari must be extended only in lari, save where the borrower’s aggregate obligations to the same lender exceed 200 000 lari as a result. The threshold is verified before the declaration.
The Conditionality of Conversion
Under Article 90, a transaction is conditional where it depends on a future and uncertain event: performance is postponed until the event occurs, or the transaction terminates upon its occurrence. The conversion trigger — the next financing round, a defined valuation or another event — is precisely such a condition. The rule for establishing the event is likewise written into the document.
Article 93 sharpens the positive condition: where a transaction is made on condition that an event occur within a defined period, the condition is deemed to fail if the period expires without the event; absent a defined period, the condition may be performed at any time, and it is deemed failed where the occurrence of the event has clearly become impossible. The conversion deadline must therefore always be defined in the document.
Article 97 empowers the mirror mechanism: a transaction subject to a resolutory condition is deemed concluded on the terms that, when the condition occurs, it terminates and restores the situation existing before conclusion. In the conversion context this describes the case where the debt is extinguished by its exchange into shares — the loan relationship ends and corporate participation takes its place. The transition is mirrored in the corporate register.
The Redemption Backstop
Article 509 describes redemption: where the seller has a right of redemption under the sale contract, its exercise depends on the seller’s will. In planning a convertible instrument, this mechanism builds the scenario where conversion does not occur and the parties need a structure to unwind through redemption. Redemption conditions harden the foundation of the loan.
Reconciling the three layers — loan, condition and redemption — is precisely the legal work that a literal transfer of foreign templates will not do: the terms must be restated onto Georgian constructions, not merely translated. A local construction replaces the foreign template.
One more practical detail: the conversion formula — how many shares or interests correspond to a unit of the loan — must be defined arithmetically in the document, since the Code supplies no default; an imprecise formula falls back to the general rules and breeds a dispute over the next round’s price. The price formula settles the dispute in advance The correctness of the structure is measured by three tests: the loan layer by legality, the conversion condition by enforceability, the redemption by realism. A document that passes all three opens the next round with the parties’ trust intact and the price formula settled in advance.
Frequently Asked Questions
Below are the most frequent questions about structuring convertible notes.
Is there a Georgian form of the SAFE?
No. The local instrument is a loan contract whose conversion operates through a conditional transaction.
How much interest is possible?
The annual effective rate must not exceed 50 percent.
What happens if the conversion deadline passes?
The condition is deemed to have failed — the event no longer occurs, and the outcome is set by the document’s remaining terms. The remaining terms carry the burden of silence.
How does the resolutory condition work?
Its occurrence terminates the transaction and restores the prior situation — that is the legal nature of conversion.
What is redemption for?
For the scenario where conversion does not happen: the right of redemption is exercised at the seller’s will.
How We Help on Legal.ge
The lawyers of Legal.ge help you build the full convertible-note document: we assemble the loan layer within the lawful interest ceiling, formulate the conversion condition with a deadline, and add the redemption backstop. Contact us — a correctly structured instrument opens the next round without dispute.