Authors: Nicoleta Cherciu (Managing Partner) and Puscuta Razvan-Stefan (Junior Associate), Cherciu&Co
Convertible Instruments Across Jurisdictions – An X-ray?
Startup financing in Europe is evolving rapidly. The pace of innovation is accelerating, and with it, so are the legal and financial instruments used to fund high-potential ventures. According to TechCrunch, venture capital investment in European startups surpassed €52 billion in 2024, marking a continued rise in alternative funding methods and a growing appetite for swiftness and risk-aligned returns. Traditional equity rounds are no longer the only route to growth. Investors and founders are looking for speed and flexibility, and convertible instruments are delivering exactly that.
As such, convertible notes have retained their usefulness as a staple in the start-up sector as most of the time they are designed to offer immediate financing with the option of future equity conversion, bypassing valuation hurdles at the early stage and speeding up closings.
However, not all convertible notes are “born” equal.
Some are friendlier than others, offering a concise structure, while still providing a sufficient and balanced level of protection for both sides of the deal. For example, the YCs SAFEs is one of the most praised contracts in the VC world as it creates a super-speed investment high-way (though not without criticism from some EU VCs; we’ll delve into whether that’s justified or not another time).
A similar instrument so-called “SAFE” is also used in Denmark, while the United Kingdom has the ASA (Advance Subscription Agreement), French investors and startups use the BSA AIRs (Bons de Souscription d’Actions-Accord d’ Investissement Rapide), Norway has the SLIP (Startup’s Lead Investment Paper), while the Belgium ecosystem tends to use the Triple S Agreement (i.e. a convertible loan agreement).
On the one hand, not only do these instruments have well established names in these jurisdictions, but they are standards and models vetted and adopted by local associations, networks, organizations, startups, investors and law firms alike. Because of that, they afford legal certainty and consistent commercial practices. Founders know what they’re signing. Investors know what they’re buying. Legal teams know how to draft and close within days, not weeks.
On the other hand, however, they are used mostly locally, for investments within the country where they have been “adopted” by the industry, differing in various respects from one another. Of course, we may assume fragmentation is justified by the differences in the applicable laws as all these are agreements governed by their respective local laws.
And then there is CEE, and particularly Romania, a market full of talent, momentum, and capital, yet still searching for its own legal rhythm in early-stage venture financing. Here, the so-called convertible loan agreement (“CLA”) is the preferred choice, but even though everyone seems to have agreed on its name, its content is still quite far from being uniform and standard.
Thus, while startups are international by design and by default, convertible notes remain unharmonized across jurisdictions, investors and founders being left with regional standards at most. To this end, we undertook an examination of these different agreements and instruments to map the legal and commercial differences between them and see whether they reveal meaningful contrasts in the investment maturity and risk appetite of different markets and their participants.
Against this backdrop, in this article we analyse what are the most important and notable resemblances and differences between the convertible notes listed above, and what makes the local practice both innovative and structurally unique.
Not all Convertible Notes Are Born Equal
From a purely commercial standpoint, typically, convertible notes provide for the conversion of the debt into equity at a discounted price with discounts ranging from 10% to 30%.
Rarely, they also provide for the repayment of the loan in cash.
For example, under Romanian CLAs, in addition to the conversion into equity at a discounted or reduced price, the parties frequently agree on an interest to the loan applicable in the case of repayment in cash. This practice is rooted in tax related norms, as well as in civil law provisions stating that, unless otherwise provided in the CLA itself, the loan is presumed by the law as having an interest (or better to say being “onerous”, which can also be the case when the conversion takes place at a reduced price). Thus, the parties may often want to agree on the interest to have legal foreseeability. For the avoidance of any doubt, this practice does not apply to repayment by conversion of shares, given that in this case the benefit normally lies in the discount/reduced price per share applicable upon conversion.
As for the repayment in cash, it is typically agreed to apply only when the company or the founders default on their conversion obligations. However, at Cherciu & Co we’ve seen cases where the investor/creditor had a right to claim either the repayment in cash, or the conversion. This can sometimes be a deadly mistake for a company. If the investor requests repayment in cash and the company does not have liquidity to pay (which often may be the case) this can result in the investor requesting the company’s bankruptcy. We’ve seen this happening. Even if the company has the cash liquidity, it can be highly disruptive to use it for the repayment of a loan.
In contrast, US SAFEs, UK ASAs, French BSA AIR, and Nordic SLIPs are designed as equity-forward instruments only, do not accrue interest, and are not intended to be repaid in cash under any scenario.
In our experience, based on cross-border transactions, we’ve noticed a practice in Germany that is similar to the one in Romania. In Germany, CLAs provide often for both discount and interest. They also provide for the company’s and/or the investors’ right for the repayment in cash after the maturity date —beyond just default scenarios. Again, we deem this practice detrimental. Neither the investor, nor the company should be looking for the repayment in cash (with interest) but for the conversion of the loan into equity.
We believe that this option should be removed entirely for both the company and the investor, as it undermines the fundamental nature and purpose of these notes, namely, to serve as investment instruments rather than debt instruments.
Other differences between jurisdictions may be rooted not only in the applicable law, but also in commercial and financial interests. While investors in a given jurisdiction are more risk tolerant, those in other jurisdictions may be more risk adverse. In this latter case, this may translate into longer CLAs providing for a stronger grip from the investors’ side.
The most commonly used clauses across jurisdictions are: Qualified Financing Round (QFR), Liquidation Preference (LP), Information Rights (IR), Most Favoured Nation (MFN), Reverse Vesting (RV), Warranties (WR) and Pro Rata Participation (PR).
We provide herein below a brief explanation of the clauses. In addition, “Figure 1” below highlights which clauses are present in each instrument and reflects the varying degrees of investor protection and legal sophistication embedded within.
A Qualified Financing Round clause sets the stage for conversion, triggering the automatic transformation of the loan into equity once the company raises a minimum agreed sum (e.g., €500,000-€1.000.000) from external investors. Upon conversion, investors typically benefit from a Liquidation Preference clause, which dictates how proceeds are distributed in an exit scenario. Liquidation preference can be structured as participatory, where investors recover their investment first and still share in remaining proceeds pro-rate with the shareholding participation, or non-participatory, where they receive the higher of their original investment or their pro-rata share of the proceeds distributed among all shareholders, but not both. The analysed models provide only for non-participatory liquidation preference and which is also the industry standard.
To maintain visibility into the company’s performance before and after conversion, investors may request an Information Rights clause, which grants access to company’s key updates such as financial statements, budgets, or cap tables. Additionally, convertible instruments may include a Most Favoured Nation (MFN) provision, which ensures that early investors are not disadvantaged if more favourable terms are offered in subsequent convertible rounds, allowing them to have those improved terms applied to them retroactively.
For founders, a Reverse Vesting clause may be implemented to ensure long-term commitment by requiring them to earn/vest back their shares over a defined vesting schedule, even if shares are issued upfront. Should a founder leave early, unvested shares can be repurchased by the company or remaining shareholders, typically at nominal value.
In addition, certain warranties may also be agreed upon in a Warranties clause. In the public (official) examples we analysed, warranties are rather minimal, but essential, and they generally refer to company’s IP ownership, legal incorporation and issuance of shares, shareholders authorizations having been obtained for the signing of the note, accurate representation of the cap table, execution capacity and absence of litigation. In Romania, however, we’ve also encountered a practice where full-fledged (10 pages) of warranties are being requested from both the founders and the company. This practice seems to have faded recently, and we support an environment where only essential warranties such as those mentioned beforehand are included in CLAs.
As mentioned, to further illustrate these differences, the following figure provides a comparative overview of the seven aforementioned core clauses commonly encountered in convertible instruments[1]:
Figure 1 Clauses distribution across Convertible Instruments
Conclusion
Our comparative analysis demonstrates that convertible instruments across jurisdictions are fundamentally more similar than different. The core commercial mechanics, such as discount-based equity conversion, qualified financing triggers, and basic investor protections, remain consistent whether dealing with US SAFEs, UK ASAs, French BSA AIRs, or Nordic SLIPs.
The notable variations we identified, such as cash repayment options in Romanian and German CLAs versus purely equity-forward structures elsewhere, represent incremental rather than fundamental differences. While these distinctions may reflect local legal traditions and risk preferences, they do not materially alter the instruments’ function as bridge financing tools.
The most significant finding is that standardization matters more than specific terms. Markets with established, industry-approved templates achieve faster deal execution and greater legal certainty. The primary impediment to efficient cross-border convertible financing lies not in substantive differences between instruments, but in the absence of recognized standards in certain jurisdictions, which creates unnecessary negotiation complexity and delays capital deployment.
[1] The underlying templates analyzed in the preparation of this comparison include public model documents of the aforementioned ASA, Danish SAFE, YC SAFE, BSA AIR, SLIP, and Triple S. As for the Romanian CLA, no public model is available at the moment, so we refer to clauses that we commonly encountered in our experience.
