Convertible Loan Agreement

The lack of governance rights, in particular the explicit enumeration of measures that would be agreed in a standard equity cycle to require investor agreement (often referred to as innuendo), is probably the most underestimated implication of a standard converter. There are (practically) no governance rights that allow transformational holders (who have invested in a convertible without having previously been shareholders of the company) to exert influence on the company. It goes without saying that these rights can be explicitly agreed between the parties. But this is extremely rare because of our experience, because the investor (lender) is not yet officially on the table, its use (future) is uncertain and can agree on relevant issues, which may take time. There is a notable exception to this rule: the STANDARD SAFE form has no duration (which is also the reason why it is not called a loan). Therefore, “SAFE” holders cannot demand a conversion (or refund) until there is equity financing or sale of the business. On the other hand, the recent shift to a post-money ceiling helps investors in this regard, as it weakens the continuation of SAFEs/Convertibles financing for founders (see above). Like proportional rights, which, as we have seen, are not the norm, but which, in our view, should be generally accepted if desired, information rights are generally not part of standard convertible credit models, but are generally unchallenged when the lender requires it. The justification is similar to that of pro-rata rights: there is no valid reason why a convertible lender should not be informed of the business of the company, as if he or she already held the conversion shares. Therefore, based on our experience, it is increasingly common to add a letter or two clauses to the loan agreement that provide for both pro-rata information and information. We recently released a legal update on the UK government`s future fund. The $250 million fund, designed to financially support innovative start-ups in the UK, is invested through convertible bonds. With this new system in mind, we looked at the main terms of convertible bonds in general and the pros and cons of these loans, both for the company and for the investor.

It is therefore customary to refer, when setting the ceiling, to an assessment of the whole transaction and not to a price per share. If this value is defined as a “post-currency” (which, in our experience with ordinary convertible bonds, is still rare, but was introduced in the “Simple Agreement for Future Equity (SAFE)” standard after a recent change, often used in the United States instead of a traditional change), it will provide the investor (lender) with a guarantee on the (percentage) of its share in the conversion: if the investor invests about 1 million euros for a post-monetary ceiling of 10 million euros, he knows that his share before dilution by the shares issued during the financing cycle will be at least 10% (EUR 1 million/10 million EUROS). From a technical point of view, this is done by incorporating the issued shares with all other convertible investors into the definition of “fully diluted shares” used to calculate the processing price.