Convertible Debt Agreements

A Convertible Debt Agreement is a financing method used by startups to raise capital while postponing valuation discussions. It allows investors to lend money to a startup with the expectation that the debt will later convert into equity under predefined conditions.

Key Components of Convertible Debt Agreements:
1-Principal Amount – The initial sum of money the startup borrows.
2-Interest Rate – The rate at which interest accrues on the principal until conversion or repayment.
3-Maturity Date – The deadline by which the debt must be repaid if it does not convert into equity.
4-Conversion Discount – A discount rate that allows the debt to convert into equity at a lower valuation during a future funding round.
5-Valuation Cap – A maximum valuation at which the debt can convert into equity, protecting early investors from excessive dilution.
6-Trigger Events – The conditions under which the debt converts into equity, such as a new funding round or acquisition.

Why Startups Use Convertible Debt:

  • Delays Valuation – Avoids setting a valuation too early, which can be difficult for early-stage startups.
  • Investor Incentives – Provides early investors with favorable conversion terms.
  • Lower Legal Complexity – Easier and cheaper to structure compared to traditional equity financing.
  • Flexibility – Allows startups to raise funds quickly without negotiating extensive shareholder agreements.

Written by Swedish Ventures, Rolf Olsson. Remarks to this article could be sent to glossary@swedishventures.se

ASO: DD-01-07

ASO IDDD-01-07