In certain investor circles, a A loan to a company that converts into shares at a later financing round, usually at a discount or subject to a valuation cap.More in glossary is treated as a signal of informality. The thinking goes that serious capital does proper equity rounds, with priced valuations, governance rights, and clean The record of who owns what in a company, including shares, options and instruments that may convert into shares.More in glossary. Convertibles, by this logic, are what founders use when they cannot get a real deal done.
That view mistakes the instrument for its execution, because a carefully drafted CLA can protect an investor as well as a priced round does.
What a CLA Actually Is
A convertible loan agreement is a debt instrument that converts into equity at a future financing event or defined trigger. The investor puts capital in today, and that capital becomes an ownership stake later, typically at a discount to the next round's price or subject to a valuation cap negotiated upfront.
The mechanism exists for a good reason. At early stages, pricing a company is often more guesswork than analysis. A CLA allows both parties to move forward without resolving a question that the market is not yet equipped to answer. The valuation discussion happens when there is enough substance to ground it.
For investors, the cap and discount mechanics can actually produce more favourable entry terms than a priced round would have offered. In the right situation, that is an advantage over the priced round.
Why Sophisticated Investors Hesitate
The common objections to CLAs are real, but they are objections to poor structuring rather than to the instrument itself.
The objections are familiar: no voting rights or board presence, ambiguous conversion timelines, unclear exit pathways, and rounds that close without proper The investigation of a company before investing, covering its business, finances, legal position and team.More in glossary because the instrument felt informal. These are legitimate concerns, and they reflect how CLAs are frequently used in practice.
The answer is to demand better terms and the same diligence you would apply to any equity investment.
What Good CLA Terms Look Like
A well-drafted CLA settles every material point before anyone signs.
The valuation cap should reflect a realistic view of the company, with enough downside protection to make the risk worthwhile. The maturity date should be hard, with automatic conversion triggers rather than open-ended optionality that leaves the investor waiting indefinitely. Interest rate, conversion mechanics in follow-on rounds or exit scenarios, and some form of information rights or governance access should all be defined before signing.
The company and its risks are identical whichever instrument is used, so the diligence should be too.
The Swiss Specifics
Swiss CLAs carry two features that investors used to other markets often overlook. The first is subordination. A CLA is a loan, so it sits on the balance sheet as debt, and an early-stage company burning cash can quickly become over-indebted under Swiss company law, which forces the board to act. Most Swiss CLAs therefore include a subordination agreement (Rangrücktritt), under which the investor ranks behind other creditors and the loan no longer pushes the company toward court. That protects the company, but it also means the investor's position as a lender is weaker than the word loan suggests, and the downside should be priced with that in mind.
The second is how conversion happens. A note does not turn into shares on its own, because the company has to issue them through a capital increase, which needs either a shareholder resolution or capital the board has already been authorised to issue. Investors should check that existing shareholders have committed in writing to vote for the conversion and waive their subscription rights, since a conversion right that depends on a future vote is worth less than it looks.
| Term | What to look for |
|---|---|
| Valuation cap | Grounded in a realistic view of the company, with enough downside protection for the risk |
| Maturity | A hard date, with automatic conversion rather than open-ended optionality |
| Conversion | Defined for the next financing round and for an exit |
| Interest | A stated rate, and how it is treated on conversion |
| Information rights | Enough access to stay informed on material developments |
| Subordination | A Rangrücktritt, with the weaker position as a lender priced into the downside |
| Conversion commitment | Existing shareholders committed in writing to vote for the capital increase and waive their subscription rights |
The Real Question
When evaluating a CLA round, the instrument is the last thing to scrutinise. The first questions are the ones that matter in any deal: is the valuation cap grounded in something real? What happens if the company never raises again? Who is leading the round and are they setting terms with discipline? Is there enough governance access to stay informed on material developments?
If those questions have good answers, the fact that the investment is structured as a convertible rather than equity is largely immaterial. If they do not, no instrument will protect you.
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