Every investment decision must be based on an examination of an exhaustive set of information provided by the entrepreneur on his online profile. Spreds only proceeds to a limited verification of these information and does not control the investment opportunity within this company. Spreds did not verify the extent to which the business plan is deemed realistic and does not intervene with the final terms of investment, including the retained maximum valuation. Spreds will align itself with the financial terms negotiated with the co-investor(s).
A convertible loan is a common way to finance business start-ups that cannot or do not wish to establish a valuation (in order to avoid restricting future funding) or simply in order to have the possibility of repaying the loan and so avoid dilution of shareholdings.
Normally, the loan (the principal and any outstanding interest) is capitalised in the company’s next capital round, with a discount (often 20%) on the valuation of a subsequent round, or is repaid at that time. It may be repaid but converted into an annuity that is repaid over a period of time.
If no capital round is concluded during the fixed term, the loan may be capitalised at a fixed low valuation or repaid at that time. It may be repaid but converted into an annuity that is repaid over a period of time.
The emphasis should be placed on the fact that a convertible loan made to a business start-up is similar in terms of risk to an investment in capital, since the loan is intended to be converted (in the case of successful fund-raising) or repaid by a young company, which usually will not have sufficient capacity to repay its debts, particularly if successful fund-raising does not take place.