When is the financing instrument suitable?

(c) aws Gründerfonds / WMWP Rechtsanwälte: Bernhard Ungerböck and Paul Koppenwallner

Originally from the Anglo-American region, the cabriolet has enjoyed increasing popularity in Austria lately. The financial instrument shifts the valuation of the company. As its name indicates, the principal is loaned by an investor in the form of a loan, which is then converted into shares of the company at a later date, at the then determined value.

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Scope in the contract design

"The timing and conditions under which conversion occurs depend on the design of the contract," says Paul Koppenwallner, partner at WMWP Rechtsanwälte. Together with Bernhard Ungerböck, head of investment at aws Gründerfonds, he is responsible for the publication of a directive on convertible loans. For this reason alone, there would be some room for maneuver on the contractual basis, as there is no specific legal provision regarding the form of financing, says Koppenwallner. It is all the more important for both parties – startups and investors – to clarify conditions very clearly. The guide should give an overview. In practice, you can not get around legal advice.

Flexible transitional financing phase

Who is the instrument for? Often, the convertible loan is cited as a good option for very young businesses, where valuation is particularly difficult. "This is an area of ​​application, but it does not make sense in any case," says Bernhard Ungerböck. In principle, the instrument is flexible in phase. This would be appropriate mainly as transitional funding. And always when an important milestone, such as significant funding, market entry, or completion of a large sales order over a period of about six to nine months is imminent.

Relatively simple structure

In the right conditions, the convertible loan, in addition to the issue of valuation, would bring even more benefits, says Ungerböck. "In the structure, convertibles are easier than equity financing, which allows for a relatively short-term capital increase, and can then be attractively positioned before a Series A round. the investment manager.

Between conversion right and conversion obligation

Because the instrument offers a potential error. "From our experience, most mistakes are made at the time of the mission as well as during the structuring," says Paul Koppenwallner. Because the above-mentioned scope opens up a variety of possibilities. The timing of change is usually linked to an event (for example, a round of financing). Here it is important to distinguish the conversion right and the obligation to change, which can also be related to different events. Depending on this, investors may also be able to go back and repay the loan with interest.

Care in Cape Town and Discount

Usually a "ceiling", ie a maximum valuation at the conversion, or a "discount" for the determined investors – they then have in the financing round better terms than the new investors. "The ceiling may be too low, the discount too high.This tends to happen when there is uncertainty about the next funding phase," Koppenwallner said. And this could discourage new investors if the convertible converts to significantly better economic conditions.

No panacea for convertible loans

There is no patent remedy for convertible loans. But Bernhard Ungerböck said: "There are still a manageable number of questions and topics to deal with". This requires a little complex and therefore a clearer structuring. This is exactly what you want to provide with the guide now published as basic information.

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