Convertible loans: model the conversion before accepting the money

A convertible loan can postpone the valuation discussion while giving a startup funding now. It does not remove the need to define the investment. The company initially owes obligations under a loan, with conversion into equity governed by the agreed conditions and the corporate steps required by Swiss law. Before signing, model both a successful financing and a year in which no financing happens. The second scenario often reveals the clauses that matter most.

Write down the conversion event

Define the financing that triggers conversion, any minimum size, the relevant share class and the treatment of accrued interest. Explain how a discount and valuation cap interact and what share-count assumptions apply. A cap is a contractual pricing mechanism, not a promise that an investor will own a fixed percentage in every future round. Include the employee pool, other convertibles and existing securities when modelling dilution. A simple spreadsheet with two realistic round sizes can prevent a major misunderstanding.

Maturity must have an answer

What happens if the loan reaches maturity before a qualifying round: repayment, extension, optional conversion or an agreed alternative? Do not leave this to an informal expectation that everyone will be supportive. Example: the company has enough cash to operate for several months but not enough to repay all notes immediately. The maturity provisions can suddenly become the main financing problem. A negotiated extension should be documented before a deadline, and any insolvency or overindebtedness concerns require prompt professional assessment.

Conversion needs company-law implementation

A signed note does not automatically create valid shares. Check the available capital mechanism, shareholder approvals, subscription or set-off requirements and commercial-register steps with Swiss counsel and the notary where necessary. Coordinate existing pre-emption rights and shareholder agreements. If the company is a GmbH, do not reuse an AG form without adapting it. Subordination, if agreed, also needs precise scope and wording; the label alone should not be treated as solving every balance-sheet issue.

Treat tax and lender structure as part of the deal

Multiple lenders, interest terms and cross-border arrangements can raise Swiss tax or regulatory questions. Obtain advice on the actual investor group rather than assuming a familiar foreign template is suitable. Keep an updated register of principal, interest, maturity, side letters and conversion rights. The useful fact: a short convertible document can produce a complicated cap table. Ask for a written numerical example and a closing checklist that someone other than the original negotiator can follow when the next round arrives.