What multiple valuation means in practice
When a convertible loan is converted into shares, the number of shares in the company increases, which leads to dilution for existing owners. The timing and terms of the conversion determine how large the effect is.
If the loan is not converted, it is instead repaid like an ordinary loan. Convertible loans therefore affect both the company's debt and its future ownership structure.
Common terms in a convertible loan
Convertible loans are governed by terms that regulate interest, term and conversion.
- Loan amount and interest rate
- Term and repayment conditions
- Conversion price or discount
- Timing or event triggering conversion
- Effects on ownership stake and dilution
When the terms are clearly defined, it becomes easier to assess how the convertible loan affects both the company and the investors.
Why companies choose convertible loans
Worth bearing in mind
Convertible loans are used when companies want to raise capital without immediately setting a fixed valuation or carrying out an immediate new share issue. The arrangement offers flexibility and can be attractive in early stages or uncertain market conditions.
For investors, convertible loans can offer downside protection through interest, while also giving the opportunity to share in future upside through conversion into shares.
Frequently asked questions
What is the difference between a convertible loan and an ordinary loan?
A convertible loan can be converted into shares, whereas an ordinary loan is only to be repaid.
Does a convertible loan have to be converted into shares?
No, it depends on the terms. In some cases conversion is voluntary, in others mandatory.
Why are convertible loans used in growth companies?
To combine flexibility on valuation with the possibility of future ownership.
Do convertible loans affect existing shareholders?
Yes, dilution can arise on conversion.
Are convertible loans common in unlisted companies?
Yes, especially in early financing rounds and when the valuation is uncertain.