WHAT IS A CONVERTIBLE LOAN AGREEMENT?

A convertible loan agreement is a contract that allows one to borrow money on a short-term basis and then convert the debt or loan into equity usually in a subsequent investment cycle.

Convertible loan agreements are popular with startups that need “seed money” and when “bridge financing” is needed until another financing package can be obtained.

WHEN ARE CONVERTIBLE LOAN AGREEMENTS NEEDED? 

Convertible loan agreements are needed when the shareholders need to lend money to a company and when “bridge financing” is needed until another financing package can be obtained.    A convertible loan agreement allows the lender to convert the loan to ordinary or preferred shares within a specific time frame and at a specific rate.  Convertible Loan Agreements are also popular with startups that need “seed money”.

WHAT ARE THE MAIN ELEMENTS OF A CONVERTIBLE LOAN AGREEMENT

• The Date:
  The date includes the loan was made but more importantly the date the loan matures. The maturity date is very important to the borrower because on this date the lender can require payment of the loan if he or she so desires.

• The Interest Rate:
  The interest rate is required however many of these agreements utiliSe Payment in Kind (PIK). The borrower does not pay cash and the interest is accrued and converted to equity along with the principal.

• Conversion Clause:
  This clause establishes the conditions by which the loan is converted to equity.

• Valuation Cap:
  This provision establishes the maximum valuation at which the loan can be converted.