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Convertible Loan Note Template for Denmark

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Key Requirements PROMPT example:

Convertible Loan Note

I need a convertible loan note for an early-stage startup seeking to raise capital from investors, with a conversion discount of 20% and a maturity period of 18 months. The note should include an interest rate of 5% per annum and a cap on the valuation at conversion.

What is a Convertible Loan Note?

A Convertible Loan Note is a popular startup funding tool in Denmark that starts as a loan but can transform into company shares later. It lets investors lend money to a startup now and convert that loan into equity when specific events happen, like a major funding round or company sale.

Under Danish corporate law, these notes give early investors special advantages: they often get better share prices than later investors and don't need an immediate company valuation. This makes them particularly useful for Danish tech startups and scale-ups that need quick funding but aren't ready for a full valuation process.

When should you use a Convertible Loan Note?

A Convertible Loan Note works best when your startup needs quick funding but determining a fair company valuation is tricky. Many Danish tech companies use these notes during their early growth phase, especially when they're between major funding rounds or preparing for significant expansion.

These notes are particularly valuable when attracting initial investors who want potential equity but aren't ready for a full share purchase. They also make sense when you need to close funding quickly under Danish corporate law, as they require less complex documentation than traditional equity deals and can bridge the gap until your next formal valuation.

What are the different types of Convertible Loan Note?

  • Standard Notes: Basic convertible loans with straightforward conversion triggers like funding rounds or exits. Popular with Danish tech startups seeking seed funding.
  • Discount Notes: Include a reduced share price when converting, typically 10-30% below the next funding round's valuation.
  • Valuation Cap Notes: Set a maximum company value for conversion, protecting early investors from dilution in high-growth scenarios.
  • Interest-Bearing Notes: Accrue interest that converts to additional shares, common in longer-term bridge financing.
  • Mandatory Conversion Notes: Automatically convert to equity at specific milestones, often used in structured funding rounds under Danish corporate law.

Who should typically use a Convertible Loan Note?

  • Startup Founders: Draft and issue these notes to secure early-stage funding while maintaining control of their company valuation timeline.
  • Angel Investors: Provide initial capital through convertible notes, gaining potential equity positions at preferential future terms.
  • Corporate Lawyers: Structure and review the notes to ensure compliance with Danish corporate law and protect both parties' interests.
  • Venture Capital Firms: Often participate in or trigger conversion events during later funding rounds.
  • Company Board Members: Approve and oversee the issuance of convertible notes as part of the company's financing strategy.

How do you write a Convertible Loan Note?

  • Company Details: Gather your Danish business registration number (CVR), current share structure, and latest financial statements.
  • Investment Terms: Define loan amount, interest rate, maturity date, and conversion triggers under Danish rules.
  • Valuation Mechanics: Determine discount rate or valuation cap for future equity conversion.
  • Board Approval: Secure necessary corporate authorizations and document them properly.
  • Investor Information: Collect full legal names, addresses, and tax identification numbers of all participating investors.
  • Documentation: Our platform generates legally compliant notes tailored to Danish requirements, ensuring all essential elements are included.

What should be included in a Convertible Loan Note?

  • Loan Terms: Principal amount, interest rate, and maturity date clearly stated per Danish contract law.
  • Conversion Mechanisms: Detailed triggers, pricing formulas, and procedures for equity conversion.
  • Security Provisions: Any collateral arrangements or subordination terms under Danish securities law.
  • Party Information: Complete legal names and registration details of both company and investors.
  • Default Provisions: Consequences and remedies for missed payments or breaches.
  • Governing Law: Explicit statement of Danish law jurisdiction and enforcement procedures.
  • Signature Requirements: Proper execution blocks for authorized representatives.

What's the difference between a Convertible Loan Note and a Loan Agreement?

A Convertible Loan Note differs significantly from a Loan Agreement in several key ways, though both are debt instruments under Danish law. The main distinction lies in their end goals and flexibility.

  • Conversion Rights: Convertible Loan Notes can transform into equity shares, while standard Loan Agreements remain pure debt until repayment.
  • Investment Purpose: Convertible Notes are primarily used for startup funding with future equity potential, whereas Loan Agreements focus on straightforward borrowing and repayment.
  • Valuation Requirements: Convertible Notes delay company valuation until conversion, making them ideal for early-stage startups. Loan Agreements don't involve valuation considerations.
  • Risk Profile: Convertible Notes offer investors potential equity upside in exchange for higher risk, while Loan Agreements provide fixed returns with typically lower risk.

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