Convertible loans can be a versatile financing tool, especially when used as a bridge between larger funding rounds, still, there are some aspects to be aware of:

• One key advantage of convertible loans is certainly that they allow you to postpone final decisions on return limits and valuations until a subsequent funding round, potentially involving more investors in these specifications.
• This, however, does not come without risks: without early agreements on valuations or conversion discounts, changes in the company’s risk profile can lead to dissatisfaction among early investors and difficult negotiations later on. If the loan is, for example, set to convert into redeemable equity but no valuation process has been defined, a higher-than-expected valuation at the time of conversion can create serious challenges for redemption — the company might no longer be able to afford buying back the shares. That said, there are ways to address this: for instance, by avoiding a mandatory conversion clause or by thinking through valuation procedures in advance.
• Early-stage investors’ risks are addressed through conversion terms, such as specified discounts (offering better terms than later investors) or guarantees of a minimum return multiple, with only the timing and repayment method dependent on the conversion structure.
• Recorded as debt until conversion (rare exceptions exist!), potentially affecting balance sheet ratios, future borrowing capacity, and investor perceptions of financial health.
• If conversion depends on milestones or conditions that aren’t met, unfavourable terms may leave the company with substantial debt.
• Convertible loans are often subordinated. Therefore, be mindful of "dry income," where deferred interest payments are taxed annually, even if not yet received.
• In steward-ownership-aligned financing, the valuation logic applied to a company may differ from that used in conventional financing contexts. As a result, “typical” discount rates (e.g. 20% to 25%) may need to be adjusted as well or be calculated differently, as they may no longer accurately reflect the appropriate risk-reward ratio.
  • Example: A company raises an initial round using convertible loans with a 20% discount. Later, a larger financing round takes place with non-voting equity offered at a 3x multiple of the initial investment. Here’s where challenges might arise: The 20% discount on the convertible loan translates to a multiple of 3,75x compared to the new round’s 3x multiple. For the investors in the convertible loan, who took on significant early-stage risk, this might feel insufficient as a reward for the risk they carried.