A convertible loan postpones the valuation discussion, but not the Dutch legal implementation
A convertible loan is a loan to a startup or scaleup that can or must convert into shares, usually upon a future equity financing round.
Convertible loans are commonly used in Dutch startup and growth financing because they allow founders and investors to move quickly without agreeing on a full company valuation immediately. The investor provides funding now, while the conversion price is determined later, often by reference to a qualified financing round, valuation cap, discount or a combination of these mechanisms.
In a Dutch BV, however, a convertible loan is not just a financing template. Conversion into shares must be aligned with Dutch corporate law, shareholder approvals, pre-emption rights, the articles of association and notarial execution. If these implementation points are ignored, the convertible loan may create uncertainty exactly when the company needs to complete its next financing round.
This article is part of the Venture Capital Insights series on Dutch BV financing, investor rights and growth company governance, with practical guidance for founders, startups, scaleups and investors involved in Dutch financing rounds. For broader Dutch VC structuring, see Raising Venture Capital in a Dutch BV.
Why convertible loans are used
Convertible loans are often used when a company needs capital before it is ready for a priced equity round. This may be the case in an early-stage round, a bridge financing, a pre-Series A round or a situation where founders and investors do not yet agree on valuation.
For founders, the main benefit is speed. The company receives funding without immediately negotiating a full investment agreement, shareholders’ agreement, amended articles and new share class. For investors, the benefit is early exposure to the company, usually with protection through a discount, valuation cap, interest and conversion rights.
The commercial logic is simple: the investor accepts early-stage risk, but should not be treated exactly like a later investor who enters once more information is available. The legal drafting must translate that commercial bargain into a conversion mechanism that actually works in a Dutch BV.
Conversion mechanics
The conversion mechanics are the core of the convertible loan agreement. The agreement should define when conversion takes place, whether conversion is mandatory or optional, which amount converts, which share class is issued and how the conversion price is calculated.
The most common trigger is a qualified financing. This is usually a future equity financing round in which the company raises at least a specified minimum amount. Upon that round, the loan converts into shares, often at the lower price resulting from the discount or valuation cap.
The agreement should also deal with other scenarios. What happens if the company is sold before conversion? What happens if no financing round takes place before maturity? Can the investor demand repayment? Is there an automatic conversion? Does accrued interest convert? Are the shares ordinary shares, preferred shares or the same class as issued to the new investors?
In Dutch practice, conversion usually requires more than a contractual notice. The issue of new shares in a Dutch BV generally requires corporate approvals, waiver or exclusion of pre-emption rights where applicable, and a notarial deed of issue. The convertible loan should therefore be drafted with those implementation steps in mind.
Valuation cap and discount
A valuation cap protects the investor if the company’s value increases significantly before the next financing round. It sets a maximum valuation for the purpose of calculating the conversion price. If the next round is priced above the cap, the convertible investor converts as if the lower capped valuation applied.
A discount gives the investor a percentage reduction to the price paid by new investors in the next round. This compensates the investor for taking earlier risk. A 20% discount, for example, means that the convertible investor converts at a lower price per share than the new money investors.
The agreement should clearly state how the cap and discount interact. In many transactions, the investor receives the better of the two outcomes. But the calculation still requires precision. Is the cap calculated on a fully diluted basis? Are options, warrants, SAFEs, other convertible loans and employee incentive pools included? Does accrued interest convert? Is the discount applied before or after the valuation cap comparison?
These points are not technical details. They determine founder dilution, investor ownership and the cap table after the next round.
Interest, maturity and repayment pressure
Until conversion, a convertible loan remains debt. That means the agreement must address interest, maturity and repayment.
Interest is often accrued and added to the conversion amount. This is easy to overlook, but it can materially affect dilution if the loan remains outstanding for a long period. Founders should understand not only the principal amount, but also the number of shares that may be issued if interest converts.
The maturity date is also important. If no qualified financing occurs before maturity, the parties need a clear outcome. Repayment may be unrealistic for a startup. Automatic conversion may be sensitive for existing shareholders. Extension may be practical, but gives the investor leverage to renegotiate.
Ambiguity at maturity is a common source of tension. A convertible loan should therefore not treat maturity as a boilerplate provision. It should reflect the realistic funding plan of the company and the investor’s downside protection.
Investor protection before conversion
Convertible loan investors are not yet shareholders, but they may still require protection. Common rights include information rights, restrictions on new debt, restrictions on issuing new shares, consent rights for major corporate actions, most-favoured-nation protection and protection against founder share transfers.
For investors, these rights protect the future conversion position. For founders, they can become burdensome if drafted too broadly. A small bridge loan should not create the same governance framework as a full Series A round.
The right balance depends on the size of the investment, the stage of the company and the likelihood of a near-term priced round. If the convertible loan contains investor rights that are too broad or unclear, they may complicate the next financing when new investors review the company’s existing financing instruments.
Dutch BV implementation
Dutch BV implementation is where many international templates become fragile. US-style convertible instruments often assume that conversion can happen automatically under the contract. In a Dutch BV, the actual issue of shares usually requires a notarial deed and supporting corporate steps.
Existing shareholders may have pre-emption rights unless these are waived or excluded. The articles of association may need to be amended if the investor receives a new class of shares, preference rights or specific economic rights. Shareholder resolutions, board approvals and updated shareholder records may all be required.
This matters for deal timing. If the convertible loan is drafted without checking the articles, shareholder arrangements and notarial requirements, the company may discover implementation issues only when the next financing round is ready to close.
For related early-stage instruments, see also the Insight on SAFE notes in the Netherlands.
Interaction with the next priced round
A convertible loan should be drafted with the next round in mind. The question is not only whether the startup can receive funding today. The question is whether the instrument will convert cleanly when a seed, Series A or growth round is negotiated.
New investors will review existing convertible loans as part of their due diligence. They will look at the conversion price, accrued interest, valuation cap, discount, investor rights, maturity position and any special protections. If the documentation is unclear, the next round may be delayed by cap table discussions or disputes about how the loan converts.
The investment agreement, shareholders’ agreement, articles of association, shareholder resolutions and notarial deed must eventually work together. A good convertible loan therefore anticipates the legal architecture of the future financing round.
Common mistakes in practice
A common mistake is using a US or UK template without adapting it to Dutch BV mechanics. The commercial terms may look familiar, but the implementation may not work cleanly under Dutch corporate law.
Another mistake is failing to model the cap table impact. A valuation cap, discount, interest and multiple convertible instruments can create more dilution than founders expect. This becomes especially sensitive when an employee option pool, preference shares or a new investor class is introduced in the next round.
A third mistake is treating maturity as a remote issue. If the financing round takes longer than expected, the maturity date becomes a negotiation point. The investor may have repayment leverage at the exact moment when the company has limited cash and needs further funding.
Practical conclusion
Convertible loans can be useful instruments in Dutch startup financing. They can provide speed, postpone valuation discussions and bridge the company to a larger equity round.
But a convertible loan should not be treated as a simple short-form financing document. The conversion triggers, valuation cap, discount, interest, maturity date, investor protections, shareholder approvals, pre-emption rights, articles and notarial execution must all work together.
For founders and investors in Dutch BV structures, the key question is whether the convertible loan helps the next financing round happen smoothly — or creates uncertainty about conversion, governance and dilution when the company can least afford it.
FAQ
What is a convertible loan in Dutch startup financing?
A convertible loan is a loan that can or must convert into shares, usually upon a future equity financing round. It allows the company to raise funding before agreeing on a full priced round.
What is a valuation cap?
A valuation cap sets the maximum valuation used to calculate the conversion price. If the next financing round is priced above the cap, the investor benefits from converting at the lower capped valuation.
What is a discount?
A discount gives the convertible investor a reduction to the price per share paid by new investors in the next round. It rewards the investor for investing earlier.
Does conversion in a Dutch BV require a notary?
In most cases, yes. If the loan converts into newly issued shares in a Dutch BV, the share issue generally requires a notarial deed, corporate approvals and proper handling of pre-emption rights.
Why can convertible loans create cap table issues?
Convertible loans can affect founder dilution through the principal amount, accrued interest, valuation cap, discount and interaction with other instruments such as SAFEs, warrants, options or other convertible loans.
About Dirk de Waard
Dirk de Waard is a Dutch corporate and venture capital lawyer focusing on Dutch BV financing rounds, convertible instruments, investor rights and growth company governance. He advises founders, startups, scaleups, angel investors and venture capital funds on investment documentation, convertible loans, SAFEs, shareholders’ agreements and Dutch corporate implementation.
Preparing a Dutch startup financing, bridge round or convertible loan?
Dirk de Waard advises founders and investors on conversion mechanics, valuation caps, discounts, maturity dates, investor protections and the Dutch BV implementation required to make the instrument work in the next financing round. Contact dirk.dewaard@viottalaw.com to structure a convertible loan before the next financing round, shareholder approval process or notarial implementation becomes time-critical.
