CLAs aren’t risky by nature—just often used without rigor.
Many professional investors hesitate when they hear the words “convertible loan agreement.” In some circles, CLAs are seen as vague, risky, or informal—an instrument favored by founders but avoided by serious capital.
We understand the skepticism. But we don’t share it.
At Paligan, we use CLAs selectively and with structure. When applied with clarity and discipline, they offer speed, access, and—when terms are right—preferential entry for investors. The problem isn’t the instrument. It’s how loosely it’s often applied.
CLAs vs. Equity: A Practical Difference
A CLA is not an equity investment. It is a loan that converts into equity at a future financing round or a defined trigger.
The benefit? It allows investors and founders to move forward without having to agree on a valuation today. That speeds up early rounds and avoids pricing a company prematurely. It also gives investors the ability to secure a discount or valuation cap—often resulting in more favorable entry terms if the company performs.
But unlike straight equity, a CLA typically does not grant immediate ownership, board seats, or voting rights. Without proper structure, it can also lead to misalignment if the company delays a priced round or exits unexpectedly.
That’s why the terms matter.
Why CLAs Can Make Sense
We don’t default to CLAs, but when we do use them, it’s with intent. Here’s why:
Speed: When rounds move quickly, equity negotiations can slow things down.
Flexibility: Postpones valuation discussions until more data is available.
Efficiency: Lower legal and transaction overhead.
Terms: Allows for valuation caps and discounts, which can provide better entry conditions for investors.
In the right context—early-stage bridge rounds, or pre-institutional raises—they can serve all parties well.
Why Some Investors Avoid CLAs
Many institutional investors (especially family offices and traditional VCs) avoid CLAs. The common reasons:
Lack of voting rights or board presence
Ambiguous timing of conversion
Unclear exit pathways
Perceived lack of diligence in CLA-led rounds
These are all valid concerns when the CLA is poorly structured. But that’s not a fault of the instrument. It’s a fault of the execution.
What a Well-Structured CLA Looks Like
Here’s how we approach CLA terms when we lead or participate in a round:
Clear valuation cap (ideally with realistic downside protection)
Hard maturity date with triggers for automatic conversion
Interest rate that reflects stage and risk
Information rights or light governance provisions
Defined conversion mechanics in case of follow-on rounds or exit
We structure CLAs to be short-term tools, not open-ended placeholders. And we apply full diligence, as we would in any equity round.
Why Investors Shouldn’t Dismiss the CLA
Appropriately used, CLAs offer:
A faster path to exposure in promising startups
The ability to negotiate more favorable entry terms
Lower complexity during early validation stages
The key is to treat the CLA with the same care as an equity round. Don’t sign a term sheet without clarity. Don’t assume a convertible means informal.
If you’re participating in a CLA round, ask:
Is the valuation cap realistic?
What happens if the startup never raises again?
Is there any governance access or transparency?
Who’s leading the round—and are they setting disciplined terms?
How Paligan Applies Discipline
We don’t chase volume, and we don’t shortcut diligence—regardless of instrument. When we invest via CLA, we do so because:
The round timing calls for flexibility
The structure is sound
The upside warrants the trade-off
We’re not in it for quick exposure. We’re in it to create long-term value.
The Instrument Isn’t the Risk. The Terms Are.
There’s nothing inherently wrong with CLAs. But too often, they’re used lazily—vague terms, unclear rights, no discipline.
At Paligan, we take a different view. CLAs can be powerful when structured with clarity and conviction. Investors shouldn’t avoid them. They should demand better ones.
That’s how we operate.
