Raise funds without valuing your company!

Are you a startup or an investor and want to carry out or participate in a fundraising without having to value a company and with limited costs and formalities?

There’s an ideal tool for you: the convertible loan.

What is a convertible loan ?

There are two main types of investment

• investment via debt, whereby an investor lends money and simply remains a creditor
• equity investment (venture capital), whereby investors receive shares in return for their investment.

Alongside equity (venture capital) and debt investments, the convertible loan is a hybrid financing instrument that combines the two in an alternative way.

A convertible loan is an advance that the company obtains from a lender, reserving the right to convert the debt linked to this loan into shares. In other words, a loan can be converted into equity (venture capital) under certain conditions.

No valuation of the company?

Valuing startups and scaleups is a tricky business. It is generally linked to their growth potential over time, so the traditional valuation methods used for established companies are not appropriate. The valuation hurdle can already be difficult, if not impossible, to overcome.

At certain stages of a startup or scaleup, the question of valuation can be particularly sensitive, especially if the company is in the startup phase without having been able to demonstrate commercial traction, or even worse if, at a more advanced stage, it is experiencing significant financial difficulties.

Convertible loans help to resolve this dilemma. The company does not have to be valued at the time the loan is granted. Instead, the valuation is postponed until the time the loan is to be converted (see our article “Convertible loans – How will the loan be converted?”).  In most cases, the conversion will be linked to the valuation adopted for a larger investment by a professional investor.

Limited cost and reduced administrative burden?

Investing via a convertible loan avoids that the investor immediately becomes a shareholder in the company. This eliminates the need to go to a notary and draft/update the company’s shareholders’ agreement. This saves the company a considerable amount of time and money, as only a private agreement needs to be signed between the parties.

A popular investment mechanism for existing shareholders

The advantages of a convertible loan described above make it a very popular financing mechanism for startups and scaleups. It is generally accepted by all types of investors.

Generally speaking, our experience at Beyond has taught us that if the startup is to succeed, and provided that the startup is careful to set a reasonable interest rate, discount and cap (see our article “Don’t be fooled by the discount and cap in a convertible loan”), the convertible loan is generally a favourable instrument for founders and historical shareholders in that it limits the dilutive effect of the investors who subscribe to it.

A convertible loan can also be an attractive option for investors who are reluctant to invest in equity or in debt and feel unable to negotiate the company’s valuation properly.

It should always be borne in mind that if the convertible loan is not converted, it will have to be repaid.