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Setting up a convertible loan

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Mr. Jaime Boogaers
Mr. Jaime Boogaers
Corporate Law
Attorney, 16 years of experience

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About us

Our expertise

Our lawyers and in-house counsel specialize in drafting, reviewing, and amending legal documents and contracts. We look not only at the legal text but also at how you use the document in practice.

Custom solutions for your industry

Every business operates differently. That is why we take your industry, customers, working methods, and specific risks into account.

Our facts

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The founders of MKB Juristen

Our organization consists of several small teams working within various legal fields. Each legal field has its own senior in-house counsel and/or lawyers.

Denian Wielhouwer

Corporate lawyer in corporate law & business expert

Denian Wielhouwer

Annelore Hendriks

Corporate lawyer, corporate law, administrative law

Annelore Hendriks

Ilja van Driel

Corporate law attorney, employment law

Ilja van Driel

Jaime Boogaers

Corporate law, ICT & privacy law, energy law attorney

Jaime Boogaers
Custom choices

Which choices determine the content?

Before drafting the agreement, you determine a number of key choices together with the other party. These choices determine the return, risk, and control.

Choice or question Why this matters legally
When does conversion take place? Choose whether the loan converts automatically upon a new investment round, on a fixed date, or only at the request of the lender. This determines when you become a shareholder.
At what rate is the conversion? Determine whether to agree on a discount and/or a valuation cap. This rewards the investor's early risk with more shares per euro invested.
What happens if no conversion takes place? Agree whether the principal is to be repaid with interest, or whether the loan is mandatorily converted at a predetermined valuation.
What guarantees and order of priority apply? Determine whether the lender receives a subordinated or preferred position and whether collateral is established for protection in the event of payment difficulties.
What control does the lender get? Choose which information rights and consent rights apply during the term and after conversion, to maintain control over important decisions.
Clauses and provisions

What components belong in a convertible loan?

A convertible loan combines features of a loan agreement and an investment agreement. The following components define the financial and legal relationship between the lender and the company.

Provision Relevant to Legal point of attention
Principal and payout At the start The amount lent, the method and timing of payment, and any tranches are recorded.
Interest During the term The interest rate and whether the interest is paid out or added to the principal upon conversion (cumulative).
Conversion terms Upon trigger event The events that trigger conversion, such as a subsequent investment round, a sale, or the end of the term.
Conversion rate, discount and cap Upon conversion The conversion rate, any discount on the valuation, and a maximum valuation (valuation cap).
Term and repayment End of term The duration of the loan and what happens if no conversion takes place: repayment, extension, or mandatory conversion.
Ranking and certainties In the event of bankruptcy or arrears The position of the lender in relation to other creditors and whether collateral has been provided.
Information and control rights During the term What information the company provides and whether the lender has rights of consent regarding important decisions.
Dilution and supplementary agreements Upon conversion Protection against dilution and alignment with a shareholders' agreement after conversion.
Use in practice

How do you use this document correctly?

The value of a convertible loan depends on careful use. Follow these steps to properly deploy and execute the agreement.

Situation What should you do? Point of attention
For signature Have both parties calculate the conversion conditions, discount, and cap using a sample scenario. This prevents parties from having a different understanding of the number of shares upon conversion afterwards.
Upon payment Record the actual payment and date in writing and keep the proof of payment. The effective date determines the interest calculation and the term, and prevents disputes regarding the amount of the claim.
During the term Maintain an up-to-date overview of accrued interest and any trigger events. In an investment round, it must quickly become clear which amount converts and at what rate.
Upon conversion Draft the shareholders' agreement and the notarial issuance of shares in a timely manner. The conversion of debt into shares is only complete when the shares have been formally issued and recorded.
Common mistakes

Common mistakes

With convertible loans, conflicts often arise due to unclear or missing agreements. You see these errors most frequently in practice.

Wrong Consequence Better approach
Do not agree on a valuation cap or discount The investor receives few shares in return for the early risk upon conversion. Agree in advance on a discount and/or maximum valuation that compensates for the risk of the early deposit.
Unclear conversion triggers The parties are in dispute regarding whether and when the loan must be converted. Describe specifically which events trigger conversion and who takes the initiative.
Interest agreement forgotten or unclear Discussion regarding the amount of the claim upon conversion or repayment. Set the percentage and determine whether the interest is paid out or added to the principal.
No scenario for failure of conversion At the end of the term, it is unclear whether it will be repaid or converted. Include a safety net provision with mandatory conversion or repayment with an end date.
No connection to a shareholders' agreement After conversion, there are no agreements regarding control, sale, and dilution. In the loan, refer to a shareholders' agreement that becomes applicable upon conversion.
Risk profile

What is your situation and what do you pay attention to?

The correct structuring of a convertible loan varies by role and stage of the business. Recognize your situation and pay attention to the associated points of attention.

Risk profile Example Focus in the document
You are an investor in a startup You are lending money to a young company without a fixed valuation. Pay attention to a valuation cap, discount, and information rights so that you are protected if the company grows rapidly.
You are a founder or director You raise capital without giving away shares yet. Pay attention to dilution and control during conversion, so that you retain sufficient control after conversion.
You bridge a period until a new round The loan serves as bridging financing. Pay attention to a clear link between the conversion trigger and the next investment round.
There are multiple donors Various parties provide convertible loans. Ensure equal terms and ranking, so that the loans convert among themselves consistently and fairly.
Additional documents

When is this document not enough?

A convertible loan arranges the transition from debt to equity, but does not cover all the agreements associated with an investment. In these situations, you require additional documents.

Situation Supplementary document Why
The loan has been converted into shares Shareholders' Agreement After conversion, you manage control, dividends, share transfers, and disputes between shareholders.
The parties cooperate structurally Cooperation Agreement If cooperation has been agreed upon in addition to financing, record the mutual obligations separately.
You share confidential business information Confidentiality Agreement During negotiations and due diligence, you protect sensitive data with a separate confidentiality agreement.
Explanation of this document

Setting up a convertible loan, why?

Not every entrepreneur knows exactly what convertible loans are, when they are needed, and which risks they must cover. Therefore, we explain below what this document entails, what to look out for, and why legal customization is important.

What is a convertible loan?
A convertible loan —also known as a Convertible Loan Agreement or CLA—is a financing instrument in which an investor lends money to a company with the right to convert that loan into shares of that company at a later date. The convertible loan is particularly popular with startups and scale-ups in an early financing phase because it avoids the need to determine a company valuation immediately—something that is virtually impossible to do accurately in the pre-seed or seed phase. The investor provides the loan now and converts it later in a subsequent financing round or at an agreed conversion time, typically at a discount to the valuation prevailing at that time. The convertible loan combines the characteristics of debt—interest, maturity, repayment if conversion fails to occur—with an option on equity. Our lawyers will draft a convertible loan for you that correctly establishes the valuation cap and discount rate, watertightly defines the conversion time and conversion price, and protects your position in the event of bankruptcy, dilution, and exit of the company.
What are the valuation cap and the discount rate, and how do you arrange them?
The valuation cap and the discount rate are the two most decisive financial parameters of a convertible loan for the investor. The valuation cap is the maximum amount at which the loan converts into shares: even if the company is valued at a higher amount in the next financing round, the early investor converts at the maximum amount of the cap. This protects the investor's share percentage and rewards them for the early risk taken. The discount rate is the discount the investor receives on the conversion price compared to the price new investors pay in the next round — typically 10% to 30%. Your convertible loan must determine which of the two parameters — valuation cap or discount rate — yields the most favorable conversion price and which applies. In market practice, the general rule is: the investor converts at the lower of the two calculated prices. Our lawyers advise you on the market-compliant parameters for your financing round.
What are the conversion moments and triggers in a convertible loan?
The conversion moment is the trigger at which the loan is converted into shares. The most commonly used conversion moments are the following: A qualifying financing round: conversion takes place automatically or at the request of the investor if the company closes a subsequent financing round above a minimum threshold size. A change of control: upon sale of the company, the loan converts or is repaid — usually with a premium. An IPO: in the event of a stock market flotation, the loan converts into shares. A maturity date: if none of the above triggers occur before the agreed term — usually two to five years — the loan must be repaid including interest, or the investor may choose to convert at the valuation applicable at that time. Please note: conversion requires a formal share issuance by the BV, which requires notarial cooperation and a resolution of the General Meeting of Shareholders. Our lawyers draft conversion mechanisms that are market-compliant and can be implemented correctly from a legal perspective.
How do you protect the investor against dilution after conversion?
After the conversion of the loan into shares, the investor holds an equity interest in the company. If the company subsequently issues new shares to other investors, the interest of the convertible loan holder is diluted. Anti-dilution clauses protect the investor against this risk. The most commonly used mechanisms are: full ratchet — the conversion price is adjusted downwards to the price of the new shares if that is lower — and weighted average — the conversion price is adjusted based on a weighted average of the old and new share prices. Full ratchet is more investor-friendly but less founder-friendly. In European market practice, weighted average is the norm. Your convertible loan must also duty of disclosure : the investor must be informed in a timely manner about new financing rounds and planned share issues so that he can exercise his conversion right in time. Our lawyers draft anti-dilution clauses that are market-compliant and balanced.
What is the difference between a convertible loan and a SAFE note?
The SAFE note — Simple Agreement for Future Equity — is an alternative financing instrument introduced by Y Combinator in 2013 and now also used in the Netherlands. The difference from a convertible loan is fundamental: the SAFE note is not a loan — there is no interest, no maturity, and no repayment obligation — but an agreement whereby the investor provides funds now in exchange for the right to shares at a future conversion moment. The SAFE is simpler and faster to implement than a convertible loan and avoids balance sheet tax on debt. However, the SAFE is riskier for the investor in the event of bankruptcy: a SAFE holder ranks second to creditors in the distribution of the estate. The convertible loan grants the investor creditor status until the moment of conversion. Our lawyers advise you on the choice between CLA and SAFE for your specific financing situation and draft the corresponding document.
How does it work at MKBjuristen?
Following a brief intake, our lawyers map out the company's financing phase, the investor relationship, the desired conversion parameters, and the exit scenarios. Based on this, we draft a convertible loan that establishes the valuation cap and discount rate in accordance with market standards, definitively defines the conversion timing and price, includes anti-dilution clauses, and protects the investor's position in the event of bankruptcy and exit. We also advise you on the notarial steps required for conversion and their alignment with your shareholders' agreement.
Are you unsure whether your document is legally correct? We would be happy to assess the sensible course of action: drafting, reviewing, or amending.
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Why not use a standard document?

A standard document often seems like a quick solution, but usually does not fully align with your company, agreements, risks, and way of working. Our legal experts draft documents that fit your situation.

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Explanation regarding the use of the document

A standard document seems cheap, until it doesn't fit your situation properly. That is why we provide custom legal solutions tailored to your business.

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Every business operates differently and faces different legal risks. Therefore, we tailor the document to your industry, customers, agreements, and way of working.

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A legal document only has value if it suits your practice. That is why we look not only at the text, but also at how you use the document in your business.

Common mistakes with legal documents

A legal document often seems simple, but small errors can have major consequences later on. In practice, we see that entrepreneurs run the greatest risk when a document does not align well with their business, agreements, or way of working.

  • Using a standard document that does not suit the company
  • Forgot important agreements regarding payment, delivery, liability, or termination
  • Have a document generated without legal review
  • Continuing to use old documents while the company has changed
  • Not knowing how the document should be used correctly in practice

A legal document only prevents problems if it suits your situation. That is why we look not only at the text, but also at your company, agreements, and risks.

Why is a standard document often not enough?

Because a standard document does not take into account your industry, customers, risks, and specific agreements, important provisions may be missing or not align well with your practice.

Can I create a legal document myself using AI?

AI can assist in creating text, but does not independently assess whether the document is legally appropriate, complete, and usable for your business. Legal review therefore remains important.

When do I need to have my document checked?

Have your document checked if your business has changed, you have new customers or services, you have doubts about existing agreements, or the document has not been updated for a long time.

Will I also receive an explanation about the use of the document?

Yes. We explain how to use the document in practice, what to look out for, and which steps are important to prevent disputes afterwards.

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Annelore Hendriks

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SME Lawyers at the Chamber of Commerce Source: Chamber of Commerce 2019
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