Raising a convertible loan in times of Corona

This post was originally published on the Ledgy blog.

At Ledgy, we’ve raised a Seed round in 2018 of €1m. To bridge towards Series A, we decided to raise a convertible loan. We had made this decision before the Corona-crisis kicked in, but since the signing happened at the peak of the global outburst, the pandemic still played a role on the final loan structure. The whole process was overall super efficient, lasting one month in total. Since we believe that many companies are currently preparing to confront the bumpy months ahead, among others with convertible loans, we wanted to share what we’ve learned.

The process

In total, from the time we had the first parameters ready (pitch deck, financial projections, loan size) and the final signing, it took us one month. And from the time the terms were agreed upon and the signing, it was roughly two weeks. We tried to make it as simple as possible and just used a trello-board and a google doc to keep track of every step. This simple measure was nevertheless key, because the main challenge is to keep the momentum even though many parties are involved, so having an overview of the progress with e.g. a kanban-board is important.

Here’s how the process looked like step-by-step:

• We agreed with the board on the pitch deck, financial projection, loan size and a table showing the pro-rata of each investor. A note here: The preparation of the pitch deck, took a significant amount of time—ca. one month including feedback from advisors—prior to the start of fundraising. Many first-time founders including us at the beginning, tend, I think, to underestimate the importance of having a great pitch deck. Investing enough time in this is key, not only in order to have a clear message when you start raising but it also has the nice side effect of creating an internal alignment about the strategy of the company.
• We reached out to all investors in a 30min 1–1 call giving them an update about why we raise a convertible, current business numbers and how much their pro-rata would amount to. At this point the terms were not yet finally decided.
• In parallel to the calls with investors, we discussed and decided the terms with our lead investor and our board. It’s important to take the final decision together with your board. Indeed, the board members have the responsibility to decide on the best terms for the company.
• We sent the final terms to all investors. In parallel, we finalized the legal side, i.e. a binding convertible loan agreement.
• The very last step was then to invite all investors to sign the agreement—of course digitally on Ledgy!

The learnings

What we learned along the way:

• As first-time founders it was at first not clear to us how to best tackle a convertible loan with existing investors. The usual process is actually to agree on terms with your lead investor and also most importantly with your board. Usually, no further negotiations are required with the other investors.
• Our most trusted advisors are also our investors. This means that it was sometimes tricky to seek advice on e.g. terms from investors who had both an advisor-hat and an investor-hat. What worked well here, was to make this paradox transparent and to address it at the beginning of the conversation: “I know you have two roles as both an investor and advisor to the company. I’d love to hear your opinion about X, from both perspectives.”
• Negotiation: For me personally, it was tough to negotiate with people I really appreciate to work with and to whom I feel very grateful for their support, namely our board members. Indeed, unlike an equity round which requires negotiations with a new lead investor, in the case of a convertible loan round with existing investors, you have to agree on the terms with your existing lead investor and board members. The main learning for me here was a basic principle of negotiation: Be clear about what’s important to you on the content but be nice on the formulation. This allows to set a clear boundary between the business and personal side of things.
• Terms: As founders it’s important to get informed about what the market standards are. In our case we used our own resources based on aggregated data statistics, as written in our blog post. We then also asked fellow founders, investors and our lawyer. Also, we used Ledgy’s round modeling functionality to simulate in seconds the effect of different loan parameters and sizes on the cap table.
• Impact of corona: Of course the fact that the pandemic just kicked in, meant that the general economic situation was much more risky. Therefore investors will tend to be more risk averse and will want to have terms that reflect this riskier environment. On the other hand, if the company has been doing well lately, it strongly speaks for better terms in favor of the company. Overall, it’s important to find a good middle way here. In our case, we agreed on standard terms and adjusted 1–2 parameters to be more investor-friendly than usual to take the economic situation into account.
• Trust: Last but not least, one of the main reasons why the process went so smoothly and fast is because a strong relationship of trust was already established between the investors and our company before we even started to raise. Indeed we report to all investors every month in a very transparent way on Ledgy. Therefore, there were no surprises on the investors’ side about the status of the business. The personal 1–1 calls at the beginning of the fundraising mentioned above also contributed to establishing trust.

We wish everyone a lot of resilience and stamina in these tough times! Further helpful resources include:

• Checklist to be prepared for the crisis by our investor Andreas Goeldi
• Ledgy’s corona crisis-offer of free signatures and financing round modeling to all startups.

Feel free to reach out if you have any feedback or questions to contact@ledgy.com!

This post and many more resources can be found on ledgy.com/blog