Convertible Loan Agreements in Serbia: What Startups and Investors Need to Know
Convertible loans have become a key instrument for early-stage startup financing. The startup receives funding immediately, while the investor retains the option to convert the loan into equity at favorable terms later on.
Key advantages of convertible loan agreements for startups:
- Flexibility - The startup doesn’t immediately give up equity, which is ideal for the early stage when valuation is still uncertain.
- Simplicity - The process is less complex than traditional equity financing.
- More favorable than standard loans - Interest rates are typically lower, and repayment terms are longer, easing the startup’s cash flow.
- Attractive to investors - Investors are motivated by the opportunity to enter the business at a discounted valuation.
Although the startup receives money in the form of debt, the agreement gives the investor the right to convert it into equity during a future funding round. As a reward for investing early, the investor typically receives equity at a 20-30% discount compared to the valuation in the next round.
This structure allows the startup’s valuation to be postponed, reducing administrative and legal burdens during the early growth phase.
Legal Challenges and Practical Considerations
A crucial part of this model is the effective conversion of debt into equity when the loan matures. In Serbia, this process can be complicated due to legal procedures around capital increases, which are under the startup’s control.
However, with a well-drafted agreement and appropriate legal mechanisms, the conversion can be carried out efficiently. If the loan agreement isn’t structured properly, it may lead to disputes or complications later on.
Therefore, it’s strongly recommended that both startups and investors involve legal experts early in the negotiation process - particularly to clarify key terms such as valuation, discount rate, and scenarios where conversion does not occur.
How Convertible Loans Work
At the time of signing, a convertible loan includes:
- Loan Amount: The capital the investor provides to the startup.
- Conversion Terms: The conditions under which the loan converts to equity - typically during the next qualified investment round.
- Valuation Cap and Discount: Investors usually receive a better deal than future investors, either through a valuation cap (maximum price per share) or a discount rate (e.g. 20%).
If the startup succeeds and raises a proper round, the loan converts into shares. If not - and a predefined deadline is reached - the startup must repay the loan, sometimes with interest.
👉 For more insights and a regional perspective, check out the original article on Bloomberg Adria.
A Smart Solution - When Used Strategically
Convertible loans are not just a shortcut - they’re a strategic tool. For startups in their early phase, they can offer a quick path to funding without the complexity of equity negotiations. For investors, they bring the chance to convert into equity at favorable terms. Still, it’s essential that both sides understand the legal, financial, and strategic implications before signing. When used thoughtfully, convertible loans can build the bridge between vision and sustainable growth.
