Already widely established in Silicon Valley, the convertible loan is gaining increasing popularity in Liechtenstein. This flexible form of financing offers numerous advantages, particularly for startups.
This blog post provides a practical overview of convertible loans.
1 What is a convertible loan?
A convertible loan is a specific type of loan agreement where the lender has the option or obligation to convert their loan into equity in the company under certain conditions (“trigger event”).
This form of financing is typical for startups and innovative companies, as it offers flexibility and can be concluded quickly. Convertible loans are usually issued as early stage investment and for interim or bridge financing.
Unlike traditional loans, a convertible loan is typically unsecured and subordinated, meaning the lender is paid only after other creditors in the event of insolvency.
2. What should a convertible loan agreement include?
A convertible loan agreement should cover at least the following elements:
- Loan agreement: This includes the loan amount, interest arrangements, term, and conditions for disbursement.
- Conversion: This concerns the conversion of the loan into company shares. It outlines whether and when the investor has the right or obligation to convert, and how the number of shares will be calculated (valuation method). From the company’s perspective, it is particularly important to ensure that the future shareholders accede to an existing or future shareholders’ agreement.
- Investor rights: In addition to information rights, special rights such as anti-dilution protection or liquidation preferences can be agreed upon.
- Subordination: The subordination ensures that the convertible loan is treated as subordinated in the event of insolvency. This can help avoid balance sheet over-indebtedness.
3. What are the advantages of a convertible loan?
The main advantages of a convertible loan are:
- Quick conclusion: Since an immediate company valuation is not required and no specific formal requirements for the agreement have to be met, convertible loans can be concluded more quickly than traditional financing rounds. This saves time and allows startups to secure urgently needed capital swiftly.
- Standardization: By standardizing a convertible loan, it can be used in the same form for a variety of investors. This saves time and costs in negotiating convertible loan agreements with investors.
- Flexibility: Convertible loans offer great flexibility in contract drafting. The terms are largely negotiable and can be tailored to the specific needs of the parties involved.
- Simplicity: The contracts are typically straightforward and often only a few pages long. This reduces the effort and costs compared to the more extensive documentation required in traditional financing rounds.
- Limited investor rights: An investor who grants a convertible loan is not a shareholder until the loan is converted and, therefore, does not have shareholder rights. Convertible loan agreements often include provisions for information rights. However, investors are generally not involved in decision-making processes within the company. In some cases, control rights, such as approval requirements for certain management actions, may be possible.
4. How does the conversion occur?
The conversion of the loan typically takes place in the context of a capital increase, where new shares are created.
In Liechtenstein, the shareholders are generally responsible for carrying out a capital increase. Therefore, from the investor’s perspective, it must be ensured that the conversion is indeed carried out. This can be guaranteed, for example, in a shareholders’ agreement, or the company’s highest governing body can create authorized capital, allowing the management to carry out the capital increase independently.
5. Conclusion
The convertible loan offers a flexible and quick financing option for startups in Liechtenstein. It is particularly attractive in the early stages or as bridge financing, serving as an alternative to traditional financing rounds. The simple and standardized structure of a convertible loan allows companies to raise capital swiftly, while investors benefit from the option to convert their loans into company shares at a later stage.
We are happy to advise you, whether as a start-up or investor, on the creation, negotiation, and implementation of your convertible loan.
Get started with us right now and contact us at office@isp.law or use our fully automated booking tool to make an appointment directly for an initial consultation at https://www.isp.law/termin-buchen/. We support you in the successful financing of your company.
