Convertible Loan Agreement

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Convertible Loan Agreement

 
 
 

INTRODUCTION

In a company's early days, the thought at the forefront of all founders' minds is investment. Where is the next payment coming from? How much will it be for? Will it allow us to reach our goals?

When a startup is seeking investment it can choose to do so in a couple of ways. It can incur a debt, or it can give up equity. One of the debt options is a convertible loan.

 

WHAT DOES IT COVER?

A Convertible Loan is an investment tool often used by early investors in startups. It is a loan which 'converts' to equity in the company once a certain milestone has been met, or a period of time has passed. One of the milestones is that at the Series A funding round the loan will 'convert' to equity. As an incentive, investors receive equity in the company at a discounted rate. This repays the risk early investors take investing in your startups.

 

WHY IS THIS IMPORTANT?

Using a Convertible Loan for early investments in your business has several benefits. First and foremost it's a quick and easy way to get capital into your company early on. It's generally cheaper and easier, from a legal costs perspective, to get a convertible loan drafted than a share subscription agreement. Also you, the founder, do not need to give up equity in the Company until the milestones have been met, such as the next stage of funding. 


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