A convertible bond loan is more flexible than a share arrangement and it is easier to exit. A convertible bond refers to a loan to which an option right has been attached. On the basis of the option right, the loan capital and the unpaid interest can be converted into a share investment if the loan is not repaid.
A number of conditions can be determined for repayment or conversion (e.g. the date of the next financing round , minimum size, turnover, result, etc.) on the basis of which the loan must be repaid or the right to enter as shares begins. The loan conversion ratio can be determined in advance or it can be linked to the company’s performance, turnover, development of the company’s value, or any other unambiguous figure that can be measured. For example, the conversion ratio to shares for a loan linked to turnover could be like this:
Upper and lower limits within which subscription prices must be are also typically determined for the conversion formula. The limits can be determined case by case anywhere, or they can be tied, for example, in accordance with the valuation of the previous and/or next financing round.
A convertible bond loan usually includes a fixed interest rate, which the company amortises regularly. Interest on the loan can be a part of the aggregate, which can be converted into the company’s shares. The loan can be (and often is) at the same time a capital loan (see previous paragraph).
The party granting the loan is not entitled, in the manner of shareholders, to participate in decision-making in general meetings of shareholders, therefore the parties granting the loan may require amendments to the shareholder agreement or the articles of association. Special terms of the bond may contain different points in relation to this, in which case they will be guaranteed special rights as though they were shareholders in the company. A convertible bond is frequently used with a directed share issue when subscribers are minority shareholders.
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