Convertible loan
A convertible loan is a loan with an option for a possible later conversion of the loan debt (often including interest) in a venture capital. The convertible loan is primarily suitable for start-up financing for start-up companies and as bridge financing , if z. B. a large round of financing, a (new) market entry or the realization of a large customer order is certainly imminent in the foreseeable future.
The lender can be a third party outside the company or a partner in the company.
Benefits of the convertible loan for the company (borrower)
The convertible loan has significant advantages for a company (borrower), in particular because the company does not have to be evaluated in detail for the loan allocation. In order to have a basis for a company valuation , start-up companies often need a 3-4 year forecast with a comprehensive business plan for other financing options , such as B. Sales planning, calculation of customer acquisition costs (CAC), marketing planning, market overview, display of market size and much more.
In the case of convertible loans, the lender and borrower usually agree on the one
- Capital amount (investment amount),
- the interest as well
- the payment modalities of the loan (one-off amount or staggered according to certain criteria being met) and
- Term, as well
- the modalities of the change.
As a rule, there are also lower transaction costs compared to equity rounds and faster implementation is possible, taking into account the organs of the company. Depending on the structure of the convertible loan agreement, notarial certification is required and very attractive conditions can be agreed, especially for the lender.
Convertible Loan Risks
The main risks of convertible loans for the lender are that the loan amount may not be matched by any valuable assets in the company (borrower). This is particularly the case with start-up companies where the
- financial resources are used to produce non-capitalizable assets, and / or
- there are high running costs,
- Development of the company within the financing period is delayed or
- not enough liquidity could be built up to service the loan claim,
whereby a convertible loan can very quickly lead to arithmetical over-indebtedness of the company, which in turn, if there is no positive continuation prognosis corresponding to insolvency law , this would lead to the duty of the company management to file an application for bankruptcy.
The risk of arithmetical over-indebtedness can be avoided by agreeing a subordination clause. In the convertible loan agreement it is then agreed that the loan claim is qualified subordinate in accordance with the provisions of national insolvency law. The convertible loan is then not taken into account or is subordinate to the determination of the company's overindebtedness
If the company (borrower) does not develop in accordance with the prognoses and hopes of the lender, in order to avoid a total loss of his claim, he usually has only a few options to react (examples):
- Deferral of repayment,
- Conversion of the loan claim into equity of the company (shares) with the risk of a worse position of the capital in the event of a later insolvency of the company,
- judicial enforcement of repayment claims with the risk of bringing the company close to bankruptcy.
For lenders and borrowers, the conclusion of a convertible loan can send negative signals to potential investors and suppliers, which can put both contracting parties at a disadvantage.
For the borrower (company), convertible loans also have risks (examples):
- the often agreed valuation discounts (e.g. 10 to 20 percent) for the lender can result in significant disadvantages for the company,
- During the conversion, the lender is interested in achieving the lowest possible company valuation, while the entrepreneur (borrower) wants to achieve the highest possible valuation,
- the loan is usually at the top of the revenue distribution,
- the convertible loan basically only provides a conversion right and no conversion obligation. Under certain circumstances, this can lead to the fact that a lender does not convert, but demands repayment of the loan that the lender has the fate of the company in hand and z. B. exerts pressure with the loan and wants to bring about even more favorable conditions for a conversion than was originally intended.
- Convertible loans increase the complexity of follow-up financing. You simply shift current (liquidity) problems and the valuation discussion into the future. Processes that are not transparent can also arise and negotiations can reduce the cost advantages of the convertible loan, e.g. B. by legal fees, be nullified.
Typical content of a convertible loan agreement
The conditions of convertible loan agreements can be agreed in one contract or in separate contracts (e.g. loan contract with the company and an additional agreement with the shareholders regarding the conditions of conversion).
Typical contents of a convertible loan agreement are:
- Agreement with the lender about the payment of the loan amount to the company,
- Obligation of the company to repay the loan amount by a certain due date,
- Obligation of the company to pay interest on the loan, whereby the interest payment is often agreed on a final maturity date in order not to burden the company's liquidity with ongoing interest payments.
- Agreement on a subordination clause (see above - Risks of convertible loans ),
- Waiver of the lender to forego repayment of the loan and the interest under certain pre-defined conditions and in return he receives the right to subscribe for shares in the company. The extent of the subscribed shares results from the amount of the claim that was waived and the valuation of the borrower (company valuation) at the time of conversion,
- Agreement on special rights ("Preferred Shares") regarding the subscribed shares of the lender,
- Agreement on information rights or certain rights of participation during the loan term for the lender,
Change
At what point in time and under what conditions the loan debt is converted into company shares exactly depends on the contract structure. In the case of start-up companies, the conversion can e.g. B. be at the first possible point in time when a realistic company valuation is possible.
In order to make it easier for the lender to decide whether to convert the loan into company shares, the lender often receives other incentives in addition to the interest on the loan. This can e.g. B. a discount on the future valuation (usually around 10-20%) or a guaranteed minimum share in the company. The conversion right can either:
- as a contractual obligation of the partners (voting agreement) or
- be designed as a legal obligation of the company itself (by the shareholders' meeting or the authorized managing director) or
- be stipulated in the articles of association with authorized capital.
Protection against dilution
If the borrower continues to take out convertible loans after taking out a convertible loan, this can dilute the benefits of the first lender . This is particularly the case if one or more subsequent loans have more favorable conversion conditions. In order to avoid this, the lender can contractually request that he receive, for example, a correspondingly structured subscription right with regard to the subscription of future convertible loans.
Formal requirements
The loan agreement can be agreed in any form. The obligation to convert the loan amount and interest into company shares may result in an obligation to comply with formal requirements (e.g. notarial acts).
literature
- Hermann Witteler: Convertible loan from the GmbH. , University thesis, Heidelberg 1966, dissertation.
- Minkus Ludwig Dietrich Fischer: The convertible loan in venture capital financing with the participation of a GmbH , Frankfurt am Main 2017, Peter Lang Verlag, ISBN 978-3-631-73947-1 .
Web links
Individual evidence
- ↑ engl. : Convertible loan.
- ↑ The term of the loan also depends on this. In the case of convertible loans for start-up companies, the term is granted for a longer term (depending on the company's phase of the company, the term can in practice be up to about seven years); in the case of convertible loans to bridge a short-term liquidity requirement, a shorter term of agreed a few months.
- ^ Christian Musfeldt: The end of the convertible loan , May 17, 2011.
- ↑ Obligation of the shareholders to vote for a corresponding capital increase in a shareholders' meeting.
