A Convertible Loan Agreement (CLA) is a legal document that specifies the terms under which a loan provided to a company will convert into equity, typically during a future financing round. This type of agreement is often used in early-stage financing scenarios, especially in the context of startups.
Convertible loans, also known as convertible debt or convertible notes, are short-term loans that convert into equity when specific conditions are met, usually at the time of a subsequent financing round (like a Series A round).
Key terms outlined in a CLA may include:
Principal Amount:
The original sum of money borrowed under the agreement.
Interest Rate:
The percentage of the principal loan amount that is charged as a fee for borrowing, representing the cost of the loan.
Maturity Date:
The date by which the loan must be repaid or converted into equity.
Conversion Terms:
The specific conditions under which the loan will convert into equity. This often includes the triggering events for conversion, the conversion rate, and any valuation cap or discount rate to be applied.
Repayment Terms:
The conditions under which the loan must be repaid, in the event that it doesn't convert into equity.
Security:
Whether the loan is secured (backed by assets of the company) or unsecured.
Default Provisions:
The rights of the lender and obligations of the borrower in case of default on the loan.
Convertible Loan Agreements offer startups a way to obtain needed financing without immediately establishing a company valuation, while providing investors with the potential upside of converting their loans into an ownership stake in the company if it succeeds.
