SeedBlink Blog

Convertible loan agreements, also known as convertible notes or CLAs, are increasingly being used by European founders. According to Reuters and Dealroom, the volume of convertible debt issued by European venture-backed firms reached a record $2.5B in 2023, up from $1.7B in 2022.

But what exactly are CLAs, and why are they beginning to capture attention in the European startup ecosystem?

This article explores the structure, benefits, and challenges of using a convertible loan agreement as a startup funding instrument for your company.

What is a CLA?

A convertible loan agreement is a financial tool startups use to raise early-stage funding. Under a CLA, an investor lends money to a startup with the agreement that the loan will convert into equity, similar to how SAFEs work when a predetermined event occurs, typically during a subsequent equity financing round or acquisition. Unlike SAFEs, CLAs include debt-like features such as interest accrual, a maturity date, and clear rules for acquiring the equity.

Key elements of CLAs include:

• Loan amount: The capital provided by the investor.
• Interest rate: The rate at which the loan accrues interest until conversion.
• Maturity date: The deadline by which the loan must either convert to equity or be repaid.
• Valuation cap: A ceiling on the conversion price which ensures that investors convert their loans into equity at a favorable rate, even if the company’s valuation rises significantly.
• Discount rate: A percentage discount is applied during conversion to reward early investment.
• Conversion event: The trigger (often a priced round or acquisition) that converts the loan into equity.

Additionally, a CLA includes a side letter represented by a separate document and typically contains additional rights or provisions that the investor wants to have but are not included in the main CLA document.

For example, the side letter may grant the investor certain pre-emption rights or other shareholder-specific rights, even though the investor is not yet a shareholder at the time of the CLA. The side letter allows the investor to negotiate and secure these additional rights separately from the main CLA.

Why are CLAs a good funding instrument for European founders?

There are a few key reasons why CLAs can be a good funding instrument for European founders:

• Flexibility - CLAs allow founders to raise funding more aggressively and flexibly than a full equity round. Founders can raise smaller amounts sequentially through CLAs rather than needing to complete a larger equity round all at once.
• Easier negotiation - The terms of a CLA tend to be more straightforward to negotiate than a full equity round, which has more moving parts.
• Avoiding early equity dilution - By using a CLA instead of an equity round early on, founders can avoid giving away too much equity at an early, potentially low valuation. This helps preserve more equity for the founders.

CLAs in the European context

CLAs are the most popular unpriced funding instrument in Europe. Here are some key points about key characteristics of convertible notes in some European countries:

Austria:

• Requires notarial deed if conversion rights are included upfront
• Typically structured as qualified subordinated loans
• Interest rates usually between 3-5%
• Standard discount rates of 15-25%
• Usual term length of 1-2 years for convertible bonds
• Conversion rights must be clearly defined at issuance
• Special reporting requirements if total volume exceeds €250,000

Belgium:

• Interest rates can be relatively low (e.g., around 5%), but still higher than traditional bank loans due to startup risk
• Quick and straightforward to set up, making it attractive for startups that want to raise funds without lengthy negotiations
• Short-term nature means startups may need to seek additional funding before maturity, potentially leading to a new fundraising process

Important note: The Belgian Financial Services and Markets Authority (FSMA) warns that such dilutive instruments can hurt existing shareholders and hold company directors liable if proper reporting and safeguards aren’t in place.

Czech Republic:

• No specific “convertible loan” mechanism exists under Czech law, so it’s usually structured as a regular loan plus a future equity subscription agreement.
• A notarial deed is required to record any capital increase in a s.r.o. (LLC) when new ownership interests are issued.
• Typical interest rates range around 5–8%, while discounts on conversion are often in the 10–20% range.
• Because there is no statutory framework, parties need to be clear about the loan’s terms and conditions, as well as the process and timing for conversion into equity.

Germany

• Often structured as subordinated loans
• Strict notarization requirements for conversion
• Typically includes both a discount (15-20%) and a cap
• Interest rates usually between 4-8%
• Mandatory conversion at long-stop date

Poland:

• Poland doesn’t have a dedicated statute for convertible notes, but they’re allowed under general contract rules. Essentially, you sign a standard loan agreement that also spells out how and when the loan will convert into shares.
• Because there’s no concept of simply “turning debt into existing shares,” conversion in Poland almost always means issuing new shares to the investor. When the loan converts, the investor’s principal plus any accrued interest is treated as an in-kind contribution (known as a “aport”) in exchange for new shares.
• Interest rates in Polish convertible notes often hover around 5–10% per year, which is added to the principal if not paid out before conversion. Investors also tend to get a discount on the share price in the next equity round, 15–25% is a common range, compensating them for taking an early risk.

Romania:

• Romanian company law does not formally recognize “convertible notes,” but they are adapted using Company Law 31/1990 and the Romanian Civil Code.
• In practice, companies and investors sign a loan agreement that can be repaid in cash or converted into shares if shareholders approve a capital increase.
• Interest rates typically align with broader European norms, and discounts of 15–25% are common in term sheets.

Switzerland:

• Interest rates usually between 1–5% (may vary), converting to equity
• Maturity date typically up to 3 years, triggering conversion
• Common conversion triggers include capital raises, milestones, or exits
• Standard discount rates of 10–25%
• Valuation caps limit the investor’s conversion price

Important note: You can't have more than 10 loans of the same kind or more than 20 loans in total. If you exceed 20 loans and are paying interest on them, you'll be considered a bank, which is not allowed unless you have a bank license under Swiss financial market laws.

The Netherlands:

• Common discount on the next round’s share price is around 20%
• A valuation cap is frequently included to protect early investors from higher future valuations
• Investors usually have the option to convert using either the discount or the valuation cap, whichever is more favorable
• Designed for quick, cost-effective fundraising, deferring detailed valuation negotiations until a later stage

When to use a CLA?

CLAs are popular for startups that need a flexible and structured funding solution. They can benefit startups in transitional phases or when traditional funding options are less practical.

Here are some of the most frequent scenarios in which CLAs proved a useful fundraising tool for founders, along with essential details about each use case.

1. In the very early stages of your company.

When the founder doesn't have a clear valuation for the company yet, a CLA can be a good option to raise initial funding without having to price the equity.

A CLA allows the founder to build the product and establish a valuation before doing a priced equity round.

2. In a bridge round.

If the founder is close to being ready for the next equity round but needs some additional runway, a CLA can be used as a bridge to that next round.

The CLA terms, like shorter maturity and lower discounts, can reflect the proximity of the next equity raise.

3. In uncertain market conditions.

A CLA can provide more flexibility than a full equity round in volatile or uncertain market environments.

The founder can raise funding incrementally through CLAs rather than needing to complete a larger equity round all at once.

4. When you want to avoid early dilution.

Using a CLA early on can help founders avoid giving away too much equity at a potentially low valuation, preserving more of the company for the founders.

5. In fundraising rounds with a sophisticated investor base (e.g., venture debt investors)

CLAs can be a flexible yet structured funding instrument when targeting more experienced or institutional investors, such as venture debt firms.

These investors value the clarity of debt terms and the opportunity to convert them into equity, making CLAs an attractive alternative to equity loans.

For more insights, watch our webinar on CLAs and their impact on fundraising rounds, which was hosted by Maximilian Schausberger, Managing Director at Elevator Ventures, was joined by Ronald Rapberger, Regional Manager DACH at SeedBlink, and Andrei Hancu, SeedBlink’s General Counsel.

Example - A startup raising with a CLA

For this, we have a growth-stage startup, TechFlow, specializing in AI-driven workflow automation. The company has reached significant milestones, including $3M in annual recurring revenue (ARR) and a strong pipeline of enterprise clients.

While preparing for a Series A funding round, TechFlow realizes it needs $2M in bridge financing to scale operations and seize new opportunities. To address this short-term need, the founders created a CLA.

How the CLA Is structured:

• Principal Amount: $2M. This is the loan amount investors provide.
• Interest Rate: 8% annual interest accrues on the loan until conversion or repayment.
• Valuation Cap: $50M. This cap ensures investors can convert their loan into equity at a favorable price if the company’s valuation exceeds $50M during the Series B round.
• Maturity Date: 18 months. If the loan hasn’t been converted into equity by this date, it must be repaid in full, including accrued interest.
• Discount Rate: 15%. If the valuation cap isn’t triggered, the CLA converts at a 15% discount to the price per share in the Series B round.

Advantages for TechFlow:

1. Access to quick funding: The CLA provides TechFlow with immediate capital to scale operations without waiting for the Series B round.
2. Flexibility: The company avoids immediate equity dilution and can raise funds without formally pricing the Series A round.
3. Investor alignment: The valuation cap and discount ensure investors are vested in TechFlow’s success, making them valuable partners.

Advantages for investors:

1. Security with upside potential: The interest rate and maturity date provide financial security, while the valuation cap and discount offer significant equity upside in the event of a successful Series A round.
2. Clearly defined terms: Unlike SAFEs, CLAs provide investors with a structured agreement that includes repayment options if conversion doesn’t occur.

Risks and considerations:

• For founders, if TechFlow’s Series A round is delayed, the loan’s maturity date could create financial strain, as the company would need to repay the principal plus interest.
• For investors, while CLAs offer more security than SAFEs, they still risk losing their investment if TechFlow fails to raise a subsequent round or grow as anticipated.

Raise your next fundraising round with SeedBlink

Whether you’re an early-stage startup or a growth-stage company looking to secure financing with Convertible Loan Agreements (CLAs), SeedBlink can help.

With SeedBlink, you gain access to

• Pitch deck and fundraising materials review, ensuring your materials resonate with potential investors.
• Matching tools and introductions to angel investors, venture capitalists, and other funding opportunities.
• Expert guidance on CLAs, helping you structure deals effectively to align with your growth strategy.
• Post-financing support, including investor communication and reporting tools to keep you on track.

Get started here.