Investor Convertible Loan whether a liability or equity?

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arif.asif
Posts: 27
Joined: 20 Mar 2020, 20:52

Investor Convertible Loan whether a liability or equity?

Post by arif.asif »

Hi everyone
I am working in a tech company where there are multiple convertible loan agreements with investors. Almost all have the same clauses extract of which is as follows:
This loan is convertible upon a qualifying event i.e
(a) Conversion on a Qualified Equity Financing, the Next Round Shares; or
(b) Liquidity Event or an Insolvency Event (where Clause 6.3(b) applies), the most senior class of Shares
issued as at the Liquidity Event or Insolvency Event, as the case may be

Qualified Equity FInancing is defined as a transaction or series of transactions with the principal purpose of raising
capital, pursuant to which the Company issues and sells Preferred Shares at a fixed pre-money valuation, where
the proceeds of such capital raising are equal to an aggregate amount of not less than USD 1,000,000.

After reading this i am not sure whether to classify such loan as liability or equity
JRSB
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Joined: 01 Mar 2020, 01:10
Location: UK

Re: Investor Convertible Loan whether a liability or equity?

Post by JRSB »

Can get quite complicated but one question here may be who is it that has the option to convert to shares? One of the tests is whether the company/issuer can settle in cash at all, or if unavoidable requirement to convert etc.
JRSB
Trusted Expert
Posts: 1309
Joined: 01 Mar 2020, 01:10
Location: UK

Re: Investor Convertible Loan whether a liability or equity?

Post by JRSB »

also, is the conversion at a fixed price (eg 5 shares per £100 of loan) or is it variable based on valuation at the time of conversion..
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