Convertible Loan

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In Bulgaria, like in other countries, convertible loan becomes an increasingly common instrument to have start-ups financed by an investor who is a party external to the company.

The subject-matter of a convertible loan agreement is the lending of funds on condition of repayment or conversion into equity or shares of the borrower at a future date. Unlike direct capital investment, a convertible loan is a debt financing instrument through which the borrower could absorb the funds much faster, and which is characterized by deferred acquisition of equity by the investor. Acquisition takes place upon the loan maturity date at a price agreed in advance or, more frequently, in the case of a subsequent “qualifying investment” by another investor at a further investment round, at a discount on the par value of the shares/the equity market value (typically around 20–25 percent). This is precisely what determines the investor’s interest in providing a convertible loan to a company at an early stage of its development.

It is essential for the parties to set out the conditions, including the thresholds, under which the loan is subject to conversion. The investor is interested in negotiating higher threshold amount of the subsequent investment to make it a qualified investment since the objective is to acquire equity in a company with a promising business and financial stability. On the other hand, it is in the interest of the borrower/investee to agree on a realistic and feasible amount.

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