- +33 773 34 23 64
- info@wallstreet-collateral.com
- Mon-Fri 8am - 6pm
Europe’s start-ups turn to increasingly complex debt deals as cash dries up
By Jerry
LONDON, March 18 (Reuters) – European venture capital-backed companies are signing up to increasingly complex convertible debt deals which risk giving investors more control or bigger payouts further down the road, people involved in the deals told Reuters.
Ultra-low interest rates allowed growing companies to complete equity funding rounds at sky-high valuations during a boom in 2020 and 2021. But as venture funding has dried up, companies and their investors have been wary of equity funding rounds which risk establishing a new, lower valuation.
Convertible debt, which changes into equity after a set period, can enable company founders to raise cash quickly and privately, without publishing an updated valuation.
The volume of convertible debt issued by European venture capital-backed firms hit a record $2.5 billion in 2023, up from $1.7 billion in 2022, Dealroom data compiled for Reuters shows.
But as the deals become more complex, they can offer investors more upside and create risks for the companies, according to Reuters interviews with lawyers, company founders and an investor familiar with the deals.
“If you don’t know what you’re doing, structured debt can be a Trojan horse,” said Ali Niknam, CEO of Dutch digital bank Bunq, who has raised via convertible debt at a previous company.
“If for whatever reason you don’t make it, and it gets converted, sometimes people lose control.”
James Wootton, a partner at law firm Linklaters, said that as companies have found it harder to raise money, the power has shifted towards investors.
This means deals are becoming increasingly “structured”, including terms that favour investors such as handing them bigger stakes if management does not meet certain targets.
Deals can be structured to create an incentive for the company to IPO or raise more funds, for example by having interest rates which accrue over time, Wootton said.
Newer convertibles include clauses that grant investors more equity if profit margins drop below a certain level or if financial targets are missed, one venture capital investor familiar with recent convertible deals said, speaking on condition of anonymity.
Advert
Termsheets have also featured agreements whereby the more time that passes until an IPO, the bigger the discount at which the debt is converted into shares, the investor added.
For some, convertibles offer an opportunity to secure alternative longer-term funding while waiting for venture capital market conditions to improve.
Josef Fuss, a London-based partner at law firm Taylor Wessing who has worked on recent deals, said he had seen an increase in the size and duration of convertible notes.
“You’re kicking the can down the road and you’re saying we’re all optimistic here, in 18 months, 24 months, the world’s going to be a different place hopefully and then we can have the valuation discussion then – that is the basic premise,” he said.
Source: Reuter
