Convertible Loan Agreement Template

1. Introduction

A convertible loan agreement is a type of financial arrangement where a lender provides a loan to a borrower with the option for the loan amount to be converted into equity in the company at a later stage. This type of agreement is commonly used in startups and early-stage companies as a way to raise capital while delaying the valuation of the company. The key components of a convertible loan agreement include the principal amount, interest rate, conversion terms, and other relevant provisions.

2. Key Components of a Convertible Loan Agreement

2.1 Principal Amount

The principal amount is the initial amount of money that the lender provides to the borrower. This amount is typically specified in the agreement and is the basis for calculating interest and conversion amounts.

2.2 Interest Rate

Convertible loans usually accrue interest over time. The interest rate is specified in the agreement and can be fixed or variable. The accrued interest may be paid in cash or added to the principal amount upon conversion.

2.3 Conversion Terms

The conversion terms outline how and when the loan can be converted into equity. This section typically includes:

• Conversion Trigger: Events that trigger the conversion, such as a future financing round or the sale of the company.
• Conversion Rate: The rate at which the loan amount will be converted into equity, often based on the valuation of the company at the time of conversion.
• Valuation Cap: A cap on the valuation at which the loan will convert into equity, protecting the lender from excessive dilution if the company’s valuation increases significantly.
• Discount Rate: A discount applied to the valuation at the time of conversion, giving the lender a favorable rate compared to new investors.

2.4 Repayment Terms

The agreement should specify the terms under which the loan must be repaid if conversion does not occur. This includes the repayment schedule, any penalties for late payment, and the conditions under which the borrower may prepay the loan.

2.5 Covenants and Representations

The agreement may include covenants and representations that the borrower must adhere to. These might include maintaining certain financial ratios, not taking on additional debt without approval, or providing regular financial reports.

2.6 Default and Remedies

This section outlines the conditions under which the loan is considered in default and the remedies available to the lender. This can include acceleration of the loan repayment or conversion into equity under unfavorable terms for the borrower.

2.7 Governing Law and Jurisdiction

The agreement should specify the governing law and jurisdiction that will apply in the event of any disputes. This ensures that both parties have a clear understanding of the legal framework governing their agreement.

3. Sample Convertible Loan Agreement

Convertible Loan Agreement

This Convertible Loan Agreement (the "Agreement") is made and entered into as of [Date], by and between [Lender's Name] (the "Lender") and [Borrower's Name] (the "Borrower").

1. Principal Amount and Interest Rate

1.1. The Lender agrees to loan the Borrower the principal sum of [Amount] (the "Loan").
1.2. The Loan shall bear interest at a rate of [Interest Rate]% per annum, compounded [Compounding Frequency].

2. Conversion

2.1. Conversion Trigger: The Loan shall convert into equity upon the occurrence of [Trigger Event], such as a qualified financing round.
2.2. Conversion Rate: The Loan shall convert into equity at a conversion price equal to [Conversion Rate], subject to a valuation cap of [Valuation Cap] and a discount rate of [Discount Rate]%.
2.3. Conversion Procedure: The Lender must provide written notice to the Borrower of its intention to convert the Loan, and the Borrower shall issue the corresponding number of shares or equity interests as specified.

3. Repayment

3.1. If the Loan does not convert, the Borrower agrees to repay the Loan in full, including accrued interest, on or before [Repayment Date].
3.2. The Borrower may prepay the Loan in whole or in part at any time without penalty.

4. Covenants and Representations

4.1. The Borrower shall maintain financial records and provide quarterly financial reports to the Lender.
4.2. The Borrower shall not incur additional debt without the prior written consent of the Lender.

5. Default and Remedies

5.1. The Loan shall be in default if the Borrower fails to repay the Loan or adhere to the covenants.
5.2. In the event of default, the Lender may declare the entire Loan amount due and payable or convert the Loan into equity.

6. Governing Law and Jurisdiction

6.1. This Agreement shall be governed by the laws of [State/Country].
6.2. Any disputes arising from this Agreement shall be resolved in the courts of [State/Country].

IN WITNESS WHEREOF, the parties hereto have executed this Convertible Loan Agreement as of the date first above written.

Lender
By: [Name]
Title: [Title]
Date: [Date]

Borrower
By: [Name]
Title: [Title]
Date: [Date]

4. Conclusion

A convertible loan agreement provides a flexible financing option for startups and growing companies. By understanding the key components and drafting a detailed agreement, both lenders and borrowers can ensure that their interests are protected and that the terms of the loan are clearly defined.

5. Appendix

5.1 Glossary

• Conversion Trigger: An event that allows the loan to be converted into equity.
• Valuation Cap: The maximum valuation at which the loan converts into equity.
• Discount Rate: The percentage discount applied to the valuation for conversion.

5.2 Example Conversion Calculation

6. Additional Resources

• [Link to Sample Convertible Loan Agreement]
• [Link to Legal Advice for Convertible Loans]