What is factoring and when is it profitable to use it?
How factoring will unfreeze accounts receivable quickly. How long will you be serving breakfast? I have your delays in the liver! - the head of the shop buzzed in the…

Continue reading →

Cardiology vet near me: surgery list for vets providing cardiology modernvet.com.
Cancellation of imposed insurance
The problem with the imposition of insurance on citizens has been taking place for more than a year. Anyone who has ever had to take a loan knows that the…

Continue reading →

Business inheritance using the Articles of Association and Corporate Agreement
Often, business growth is impossible without attracting partners in its individual areas / projects / companies. And relations with such partners must be pre-regulated and legally secured, which is guaranteed…

Continue reading →

The second wave of coronavirus: what should businesses do?
More than half of entrepreneurs have not yet recovered from the first wave of coronavirus, and experts are already predicting a new outbreak. We tell you whether it is possible…


Cancellation of imposed insurance
The problem with the imposition of insurance on citizens has been taking place for more than a year. Anyone who has ever had to take a loan knows that the…


Convertible loan as an investment tool

Тtraditionally, investment transactions are realized through ordinary loans or direct investments (creation of a joint venture or purchase of a stake in an existing company). Today we will consider a difficult but interesting investment instrument – a convertible loan.

Briefly refresh what tasks classical instruments solve
Loans are used when a company (borrower) needs to finance short-term or long-term projects, and an investor (lender) wants to capitalize on this by claiming interest income. Neither the borrower nor the lender is interested in building strong corporate relationships.

Direct investments are used when a company needs serious cash injections for business development. As a rule, such a company has an understandable developing business and the owner intends to share a share in the business in exchange for investments, and the investor – to receive benefits from the increase in the value of the business.

Investing in startups
None of the classic instruments is suitable for investing in young and ambitious start-up companies, especially in the early stages of a project.

Why is that?

On the one hand, we have a startup founder who is looking for funding for his project, who has nothing to offer except a share in the business. At the same time, there is faith in the success of the idea and the expectation of financial success, but the total amount of investment required is not clear.

In addition, a startup, like any young company, may not have the financial capacity to service a loan for a long time. Debt repayment and interest payments will regularly reduce working capital, and in the early stages this will significantly affect the growth of the business.

On the other hand, an investor who plans to extract the maximum possible profit, since this justifies the high investment risks. And at the same time, the investor wants to minimize the risks of non-return of the invested money if something does not go according to plan.

It is also difficult at this stage to agree on the size of the share that the investor will receive. How to evaluate the idea and the role of this investment round in its success?

A compromise is to arrange an investment deal in the form of a convertible loan.

What is the purpose of a convertible loan?
A convertible loan, unlike classical instruments, offers several scenarios depending on the fulfillment / non-fulfillment of conditions:

The company complies with the terms of the investment deal. The investor receives shares (shares) in the company, and the loan is transformed into the capital of the company. The amount of the share that the investor receives is fixed initially or is determined by the formula described in the loan agreement.

The company does not comply with the terms of the investment deal. The investor has the right to demand the return of the loan and the payment of interest accrued from the date of the loan to the date of the actual return.

For clarity, we will give an example of the operation of the loan conversion mechanism.


Ivan came up with the service “Such is Not Yet”. The lack of money to implement the idea led Ivan to seek funding. According to modest estimates, it will take 3 years and 1 million USD to reach a confident profitable level. Alexey agreed to invest in the project.

Alexey and Ivan agreed on the following terms:

The loan is provided for 3 years, the interest rate is 5% in the first three years and 25% in case of impossibility to convert the loan for reasons beyond his control;

Alexey has the right to convert the loan after three years or earlier, at the same time as attracting a new investor to the project. At the same time, the share he received in the company cannot be less than 15%.

At the end of the first year of work, the invested funds ended, but the project looks promising. Ivan is looking for a new Investor, he is the Fund, which agrees on an investment of 2 million USD, valuing the entire business at 10 million USD. The fund intends to receive 20% in the authorized capital of the company.

At this point, Alexey decides to convert the loan he provided into a share in the company. Based on the valuation of the business by the Fund, its share should have been 10%. However, the loan agreement provides for a guarantee – its share cannot be less than 15%.

Thus, the project raises a new round of investments, the Founder continues to develop the project, and Alexey receives a 15% stake in the company. Initially, it was impossible to agree on such a size of his contribution.

What are the benefits of a convertible loan?
As you probably noticed, a convertible loan can be of interest to both the investor and the founder for the following reasons:
The speed of registration, which allows you not to waste time on approvals, but to start “mastering” investment funds, conquering the market;

The investor has freedom of choice. If the business is successful, the investor can become a member (shareholder) of the invested company. If the business does not take off, the investor will return the money and receive a return in the form of interest. Or say goodbye to money, but avoid the fate of remaining a member of an inactive company;

A convertible loan increases the security of investments. The investor reduces the risks of obtaining illiquid shares (shares)b

Most Effective Methods
Three main rules First of all, let's look at three rules that you need to keep in mind when looking for the right channel to promote your business. The cost…


Types of cash flows: operating, investment, financial
You count the money at the end of the month and see that the expenses are more than the income, which means that it has gone into negative territory. I…


The first rule of building a group of companies without signs of artificial fragmentation
Let's remember what we know about business processes? They have a beginning and an end, that is, they have boundaries in time. There is an “exit”, to which a unique…