What Is a Convertible Loan Agreement?

A convertible loan agreement is a financial contract in which an investor lends money to a company, with the option to convert that loan into equity (usually common shares) at a later date, often during a future funding round or once specific milestones are hit.

It’s basically a hybrid between a standard loan and an equity investment. The investor provides capital upfront, typically when it’s too early to determine a fair valuation. Instead of expecting simple repayment, they gain the right to convert their debt into ownership. It’s a win-win: startups get early funding without giving up equity too soon, and investors get a chance at future upside.

These agreements are especially popular in startup circles. Valuation is often a moving target in the early stages, so delaying that discussion makes sense. Meanwhile, interest provisions, repayment terms and conversion mechanics help balance risk and reward for both sides.

When to Use a Convertible Loan Agreement

Convertible loan agreements shine when you need short-term capital but aren’t ready to set a valuation. This scenario often comes up during pre-seed, seed or bridge rounds, where financials are still fuzzy and projections are part science, part guesswork.

You gain fast access to capital without the pressure of equity negotiations. You can delay the valuation conversation until a future financing round, when traction, metrics and market interest are more solid. On the flip side, investors often get a discount or valuation cap, which rewards them for taking early risk.

These agreements also work well when:

• You’re between rounds and need bridge financing.
• You want in quickly without lengthy negotiations.
• A major event, like a product launch, is on the horizon and may impact valuation.
• You prefer the structure of debt with the flexibility to convert later.

Who love using convertible loans? Founders, lawyers, accelerators and early-stage investors who want a clean, standardized way to move deals forward without sacrificing legal protection.

What’s Included in a Convertible Loan Agreement?

It’s all about striking the balance between flexibility and legal precision. Here’s what’s typically covered:

1. Loan Amount and Disbursement

This clause defines how much capital the lender is providing, when it must be paid, and under what conditions. The payment is often made in a single installment, typically once specific closing requirements, like approvals or documentation, have been fulfilled.

2. Interest

This section explains the interest rate applied to the loan and how it accrues over time. Interest is usually calculated as a fixed percentage and is payable either at maturity or upon earlier conversion to equity.

3. Repayment Terms

Repayment terms specify how and when the borrower must repay the loan. This may include monthly installments after a grace period, a final maturity date, or early repayment options. Some agreements also tie repayment to business performance, such as allocating revenue from a particular project toward the outstanding balance.

4. Conversion to Equity

This clause gives the lender the right to convert the outstanding loan into company shares at a pre-agreed conversion price. It typically describes the mechanics of how to initiate the conversion and may include additional rights, such as receiving bonus warrants alongside the shares.

5. Bonus Shares and Warrants

To reward early risk, lenders are sometimes granted bonus shares at the time of loan issuance or warrants that allow them to purchase additional shares in the future. These instruments add upside potential if the company performs well post-investment.

6. Registration and Transfer of Shares

This provision outlines whether the issued shares are subject to transfer restrictions under securities laws. It also details the conditions under which those restrictions may be lifted, including registration exemptions or the passage of time.

7. Events of Default

Events of default describe situations that allow the lender to call the loan due immediately. These can include missed payments penalties, failure to issue shares after conversion is requested, insolvency, or other breaches of the agreement.

8. Closing Conditions

Before the loan becomes effective, certain conditions must be satisfied, such as the lender completing due diligence or the company obtaining board approval. This section ensures the deal doesn’t proceed without key preconditions being met.

Convertible Loan Agreement Template

This convertible loan agreement template is built for early-stage funding deals where debt may later convert into equity. It’s structured to support clear, efficient transactions between startups and investors, whether you’re raising a seed round or bridging to Series A.

Inside, you’ll find all the key components: loan amount, interest rate, repayment schedule, conversion rights, bonus share provisions and default triggers. There’s also an optional security agreement, making the template suitable for deals backed by collateral.

The agreement includes customizable fields so you can quickly adapt it to your company’s details, legal jurisdiction and funding terms. A built-in conversion notice form ensures the equity handoff happens smoothly and by the book.

If you’re using this template within our contract management platform, you’ll save even more time. Features like dynamic fields, electronic signature support and contract redlining tools help streamline negotiation and close deals with less friction.

Whether you’re securing fast capital as a founder or formalizing early exposure as an investor, this template gives you a dependable foundation to close the deal, efficiently and confidently.

FAQs

What Is the Main Advantage of a Convertible Loan Agreement?

The main advantage is flexibility. A convertible loan lets startups raise funds quickly without negotiating a valuation upfront. For investors, it offers the upside of equity ownership later, often at a discount or with bonus shares, while still functioning as a loan in the short term.

How Does a Loan Convert into Equity?

Conversion usually occurs when a triggering event takes place, such as a future equity financing round. The lender converts the loan, including any accrued interest, into shares at a predetermined price or at a discount to the next round’s valuation. The process is initiated by submitting a written conversion notice.

Do Convertible Loans Always Convert, or Can They Be Repaid?

They do not have to convert. Most agreements allow the company to repay the loan in cash if the investor chooses not to convert. Some contracts include mandatory conversion clauses that apply in specific situations, for example after a qualified financing round.

Are Convertible Loans Suitable Only for Startups?

While they are most common in early-stage startups, convertible loans can be used by any business that wants to delay valuation while accessing capital, particularly in fast-moving or innovation-driven industries. They are also a popular tool for bridge financing between funding rounds.

What Risks Should Founders Watch Out For?

Founders should review conversion terms carefully, especially the conversion price, valuation cap and any automatic triggers. Poorly structured agreements can lead to excessive dilution or unexpected equity stakes for investors. A thorough legal review is highly recommended before signing.