Convertible Loan Agreement Meaning

A liquidity event: to do so, the loan must be converted into equity just before a liquidity event. The most likely liquidity events are the sale of shares or a merger of the entity, resulting in a change of control or sale of all the company`s assets. More optimistically, an IPO would be a liquidity event; More pessimistic is liquidation and liquidation. A convertible bond allows shares of the company to be issued instead of repaying the loan. As has already been said, a converted loan is a short-term debt converted into equity. As a rule, it is transformed in the next investment cycle. For example, if you get your initial capital investment in the form of a converted loan, it will be converted into equity if you increase your Series A investment. If lenders feel that the terms of the credit note are acceptable, they ask the company for the right to pre-pre-pre-pre-report credits as part of the credit note. When the entity authorizes a loan allocation to a lender, the terms of that specific loan are recorded in a credit certificate. The loan certificate is issued to the lender after receiving the loan by the company. The downside also arises from the nature of the loan: until the loan is converted into equity, the investor has a priority right on the due date to claim assets (i.e. cash – hardware for most startups) to repay the loan and interest.

It goes without saying that most start-ups do not have enough money to repay the loan at maturity and are therefore obliged to liquidate all assets and close the business. The investor can also insist on a valuation cap. A valuation cap would protect the investor in the event of a sudden increase in the valuation of the entity being the subject of a stake. The loan would continue to convert into equity at the trigger event (i.e. the qualifying round or specific date), but at a different price, based on the valuation ceiling. The Valuation Cap is another way to reward seed internship investors for acquiring additional risks. The valuation cap sets the maximum price that the loan converts into equity. For example, if the valuation ceiling is $10 million and the new investor vass the business to $15 million, the converted loan will be converted with a valuation of $10 million.

It is negotiable and market practices are different. As far as financing startups is concerned, it is customary to see interest-free convertible bonds, with interest calculated from the due date or a default event. But interest is also widespread. After all, it is a loan. A converted credit contract is a hybrid financial instrument, partial debt and partial capital. It acts first as a loan, but turns into equity in the case of qualified financing, either automatically or at the discretion of the investor and/or the company. Qualified financing is either financing at a minimum valuation of the predetermined business or at a minimum predetermined investment amount. If the loan is not converted into equity, the loan must be repaid either on the due date or at the request of a default. 18.

Other actions – Each of the parties will execute and provide, at the request of the other party and at the Company`s expense, all other documents and will perform all the deeds and things that that party may reasonably require for the fulfillment of the true intent and service of that loan agreement. Before looking at individual concepts, it is important to distinguish between the two most commonly used investment methods: convertible bonds and equity. In the case of a stake, an investor receives a stake in the company for cash. Simple and simple. If the investor instead makes a convertible loan available, he will provide a loan with a maturity date, interest and a particular turning point: the right to later convert the loan into a stake in the company.