2021: Russia adopted a law on convertible loan
On June 8, 2021, the State Duma adopted a law on convertible loan in the second and third readings, thanks to which startups will be able to attract investments and reduce risks more quickly.
A convertible loan is a method of investing in which an investor can return money or receive a share in the company in return. When converting, the parties to the transaction indicate in the contract the formula for calculating the investor's share and other conditions.
According to the director of legal initiatives FRIIAlexandra Orekhovich, in accordance with the new law, the company will receive money in exchange for debt obligations, that is, the investor does not immediately acquire a share in the capital. This eliminates the need for a long and exhausting due diligence procedure. In addition, the number of documents necessary for the conclusion of the transaction will be reduced.
A convertible loan agreement is actually a loan agreement for financing at the initial stage. At the same time, instead of a one-time purchase of a share or entry into capital, the investor gives the startup money in debt. In exchange, the startup agrees that the debt is converted into shares and/or a share in the authorized capital. The conversion condition can be, for example, the next round of investments from a new investor or the performance indicators. For investors, it is beneficial in that it does not oblige to immediately acquire a share. At an early stage, this is a serious argument in accelerating the investment process
Since the investor incurred additional risks by giving money at the initial stage, he can receive shares/shares at a discount (compared to market conditions for entering capital at the time of conversion). If the conversion conditions do not occur, then the startup returns the received loan.
The new rules established by the bill reduce the risks of both parties to the contract. Now the investor has guarantees that if the loan is attracted by the company itself, then he will receive a stake in it due to an increase in the authorized capital. That is, the founder does not risk either his share or other property, noted in the FRII.[1]
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