CLA Financing in the Netherlands: Convertible Loan Agreements for Startups and Scale-ups

CLA Financing in the Netherlands: Convertible Loan Agreements for Startups and Scale-ups

CLA financing in the Netherlands usually refers to financing through a Convertible Loan Agreement: a loan that can or must convert into shares at a later stage. Dutch startups and scale-ups often use CLAs as bridge financing before a priced equity round, because a CLA can be documented faster than a full investment round with amended articles, a shareholders’ agreement and a complete governance package.

For foreign investors, the key point is that a Dutch CLA is not just a short-form bridge note. If the borrower is a Dutch BV, conversion into shares must ultimately work within Dutch corporate law, the articles of association, shareholder approvals, pre-emption rights, notarial implementation and the future equity round documentation.

This insight is part of the broader series on Dutch venture capital and growth company governance and should be read together with the expertise page on Convertible Loan Agreements in Dutch startup financing and the broader insight on convertible loans in the Netherlands.

Why Dutch startups use CLA financing

A CLA is often used when a company needs funding, but a full priced equity round is too early, too slow or too complex. This may be the case for runway extension, bridge financing before a Series A, an interim investment by existing shareholders, or a fast angel or seed investment.

For founders, the attraction is that the valuation discussion can be partly deferred. For investors, the attraction is that they can invest early and receive economic protection through a discount, valuation cap, interest component or favourable conversion mechanics.

But the valuation discussion is not removed. It is moved into the conversion formula. For a broader overview of early-stage financing instruments, see also Alternative financing instruments for early investments.

Conversion mechanics are the core of the CLA

The conversion clause is the central part of the CLA. It determines when the loan converts and at what price.

Common conversion triggers include a qualified financing, maturity date, exit event, insolvency event or voluntary conversion with the consent of the investor or company. In a qualified financing, the loan typically converts in the next equity round, often at the lower of a discounted round price or a price based on the valuation cap.

For founders, the key question is how much equity the investor may receive on conversion. For investors, the key question is whether conversion is sufficiently clear and not dependent on too many discretionary decisions by the company.

Valuation cap and discount

The valuation cap protects the investor if the company’s valuation increases significantly before the next round. It allows the investor to convert as if a lower valuation applied.

The discount rewards the investor for investing earlier and taking more risk. If the next round is priced, the CLA investor may convert at a discount to the price paid by the new equity investors.

Where both a cap and discount apply, the CLA should specify which conversion price prevails. Usually, the investor receives the more favourable price. This is where founder dilution can become much larger than expected.

Interest and maturity date

Until conversion, a CLA is legally a loan. It will usually contain interest and a maturity date. The important question is what happens if no qualified financing has occurred by maturity.

The options include repayment, automatic conversion, conversion at a pre-agreed valuation, extension or a decision by a majority of CLA investors. For startups, repayment may be unrealistic. For investors, a maturity date without a clear consequence may be too weak.

A well-drafted CLA therefore deals with the scenario where the expected financing round does not happen.

What happens on an exit?

A CLA should also address what happens if the company is sold before conversion. Investors will usually not want the company to be sold while their CLA remains economically unresolved.

Common solutions include conversion immediately before the exit, repayment with a multiple, or the right to receive the higher of repayment plus interest and the amount the investor would have received on an as-converted basis.

For Dutch BV companies, this must be practically executable. Conversion immediately before an exit may require shareholder resolutions, notarial issuance of shares, updates to the shareholders’ register and alignment with the sale documentation.

Dutch BV implementation issues

For a Dutch BV, conversion into shares is not just a contractual calculation. The issuance of shares usually requires corporate approvals and notarial implementation. The articles of association, shareholders’ agreement and existing investor rights may affect whether and how conversion can take place.

Pre-emption rights, reserved matters, consent rights, anti-dilution provisions, information rights and existing preferred share rights should be checked before the CLA is signed. Otherwise, a commercially agreed conversion mechanism may later run into Dutch corporate law or governance constraints.

This is especially relevant where the company has multiple CLAs, existing preferred shares, a STAK structure, employee participation arrangements or foreign investors familiar with SAFE-style documentation.

How Dutch CLAs differ from SAFEs and common law notes

Foreign investors may be familiar with US-style SAFEs or common law convertible notes. A Dutch CLA may look similar economically, but implementation is different.

A SAFE is usually not a loan. A CLA is typically structured as debt until conversion. That means interest, maturity, repayment and creditor rights may matter. At the same time, conversion into shares in a Dutch BV requires the corporate and notarial steps needed under Dutch law.

For foreign investors, the practical insight is this: do not only review the economics of the cap and discount. Also check whether the Dutch BV can actually issue the shares on conversion and whether the existing governance documents support the agreed mechanism. For more detail on SAFE-style instruments in Dutch BV structures, see SAFE Notes in the Netherlands: Do They Really Work?.

Investor rights before conversion

A CLA is usually lighter than a priced equity round. However, investors sometimes request information rights, most favoured nation clauses, pro rata rights, consent rights or side letter protections.

Founders should be careful not to give away too much governance control before the priced round. Investors, however, need enough protection while they are lenders and not yet shareholders.

In Dutch practice, CLA investor rights should be functional and proportionate. Overloading a bridge CLA with equity-style governance rights can make the next financing round more complicated.

Cap table impact and founder dilution

A CLA may appear simple because no shares are issued at signing. Economically, however, dilution starts when the CLA is signed. Multiple CLAs, accrued interest, discounts and valuation caps can create significant dilution at conversion.

Before signing, founders should model conversion outcomes at different next-round valuations, including downside scenarios, no qualified financing, an exit before conversion and multiple bridge rounds.

For investors, the same modelling is useful to understand whether the CLA provides the intended economic exposure. This also connects to the broader cap table issues discussed in Cap Table Adjustments in Dutch Startups and Scale-ups.

Conclusion

A CLA can be an effective financing instrument for Dutch startups and scale-ups. It is often faster and lighter than a full equity round, but the economic and legal consequences can be significant.

The key points are conversion mechanics, qualified financing, valuation cap, discount, interest, maturity, exit treatment and Dutch BV implementation. Founders should avoid treating a CLA as a simple bridge loan. Investors should ensure that the conversion mechanics are not only commercially agreed, but also legally and practically executable.

A well-drafted CLA connects the financing need, cap table, articles of association, shareholders’ agreement and future investment round.

FAQ

What is CLA financing in the Netherlands?

CLA financing usually means financing through a Convertible Loan Agreement. The investor provides a loan that can or must convert into shares, usually in connection with a future equity financing round.

How is a CLA different from a SAFE?

A CLA is typically a loan until conversion, with interest, maturity and possible repayment rights. A SAFE is usually not structured as debt. In a Dutch BV, conversion under a CLA also requires corporate and often notarial implementation.

Why do Dutch startups use CLAs?

Dutch startups use CLAs because they can be faster and lighter than a full priced equity round. A CLA allows the company to raise bridge financing while deferring part of the valuation discussion to the next financing round.

What should foreign investors check in a Dutch CLA?

Foreign investors should check the conversion triggers, valuation cap, discount, maturity, exit treatment, investor rights, pre-emption rights, shareholder approvals and whether the Dutch BV can actually issue the shares on conversion.

Practical support with Dutch CLA financing

CLA financing can be an efficient bridge instrument, but the real issues are in the conversion mechanics, cap table impact and Dutch BV implementation. A bridge financing should not only close quickly; it should also work when the next equity round, conversion or exit takes place.

I advise founders, startups, scale-ups, investors and M&A advisers on Dutch venture capital and growth financing, including Convertible Loan Agreements, SAFE-style instruments, equity rounds, shareholders’ agreements, articles of association and governance documentation. As partner at VentureLawyers, I work with a wider team of M&A, VC and PE lawyers on Dutch and cross-border transactions.

For a practical transaction-level review of a Dutch CLA, term sheet or financing structure, contact Dirk de Waard at dirk.dewaard@viottalaw.com.