In short, a convertible loan is a loan that you can convert into shares in your company. More and more startups are choosing this option. In the initial phase, it is often difficult to give the company a realistic rating. With a convertible loan you can determine the valuation after conversion. In this article you can read how this works!
A convertible loan is a loan that you can convert into shares in the company. With a convertible loan, you cannot pay off in the first years and no shares are issued. This grace period is usually three years. After these three years you can convert the loan into shares. The advantage of this is that the entrepreneur has sufficient time to generate cash flow.
A convertible loan is also an interesting form of financing for investors. As an investor you step in at an early stage and receive a discount when issuing the shares. In addition, the company continues to develop over the years into a successful business. Because of this you managed to get hold of interesting shares for relatively little money.
It is also possible to have the full loan plus the agreed interest paid out at the end of the term. The interest rate is usually between 4 and 10 %. This low interest rate is lower than other business loans. You can make the necessary return at a later time.
What does the agreement say?
An agreement is concluded between the entrepreneur and investor. It contains the following points; the amount of the loan, the interest rate and the conversion date. The conversion date is the date when you can convert convertible. Another important point is the discount percentage that the current investor receives compared to the new investors.
A final important point is the CAP. This is a maximum company valuation at which the loan is converted into shares. This is intended to protect the investor. The investor is thus assured of a certain minimum percentage of the shares.
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