The Capital Waters Convertible Loan Agreements Are Now Online

A well balanced convertible loan agreement should thus not be missing from the documentation on offer at Capital Waters, so we are happy to be able to provide you with our template as per today.

Over the past few years, convertibles have become more and more mainstream for early stage financing. A well balanced convertible loan agreement should thus not be missing from the documentation on offer at Capital Waters, so we are happy to be able to provide you with our template as per today. You can download it here, both in an English and Dutch version.

A convertible loan agreement is a hybrid financing instrument, part debt and part equity. It initially acts as a loan, but typically will convert – either automatically or at the discretion of the investor and/or the company –  into equity in the event of a qualified financing. A qualified financing will either be a funding at a pre-determined minimum valuation of the company, or at a pre-determined minimum investment amount.

Opting for a convertible is considered a fast and cheap way to get a startup funded. There is no need for a notary and lengthy transaction documentation, and the discussion on valuation of the company can be postponed until the envisaged next qualified financing round.

Below is a brief overview of some material terms of the Capital Waters convertible:

Repayment and interest

The Capital Waters convertible is a bullet loan, meaning the principal amount of the loan plus accrued interest will be repaid at once on the maturity date, or converted into equity.

Conversion events

Automatic conversion will be triggered at the company’s next equity financing, as well as in the event of an acquisition of the company. On the maturity date, at the election of the majority of the lenders, the loans will be converted or paid back.

Discount

At conversion, the loan will convert into equity at a discount of 15% to the applicable conversion price.

Valuation cap

In addition to the discount, it is not unusual to include a valuation cap against which the investor can convert into equity. In the event that the value of the company would sky rocket during the term of the loan, a cap will ensure that the investor will not end up with an extremely small stake in the company despite the discount. A cap is inserted in the Capital Waters convertible meaning the investor will have the option to either convert at the discounted price applicable to the conversion event or the price payable when using the valuation cap. An advantage for the company is that by adding the cap there will be no incentive for the investors to try and minimize the valuation at the next financing round. A disadvantage however is that subsequent investors may try to use the cap as a valuation ceiling, therewith making it more difficult to agree on a valuation much higher than the cap.

Other covenants

Despite the investors not being entitled to any actual control through equity yet, certain material resolutions of the Company require the prior consent of the investor, e.g. paying out dividends, issuing shares, entering into mergers, divisions or a dissolution of the company. In addition, the investor will be awarded certain minimum information rights.

Events of Default

The loan and interest will become immediately due and repayable in the event of a material breach of the company’s obligations, insolvency events and in the event of attachment of the company’s assets.

We need feedback!

As always we have observed the following key principles when designing the convertible loan agreement:

  • Simplicity – keep it simple, brief and readable
  • Neutrality – no intention to favour either founders or investors
  • Open source – free to use and free to revise

We would very much appreciate you to send us your feedback on the agreement, so we can keep on improving it. Last but not least, we are happy to provide you the agreement but the use thereof is at your own risk, so please read the disclaimer.

We hope that many startups and investors will benefit from the freely available documents on www.capitalwaters.nl We keep on working on providing new and improved documents to reduce time and costs of setting up a business and making investments in early stage companies. Please feel free to contact us with any enquiries on info@capitalwaters.nl.

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