Investments are always risky, both for the investor and for the target, which raise a difficult choice for the parties: convertible loan agreement (“CLA”) or option.

There are often many various details and factors to consider in making the right choice, which our team has summarised for you in an alert.

What is the difference?

▫️ CLA is a loan agreement under which the lender, instead of repayment of all or part of the loan, may demand (1) an increase in its share in the borrowing company or (2) an acquisition of participatory interests/placement of additional shares in the borrowing company.

▫️ Option to conclude an agreement – a mechanism that provides an opportunity to obtain the right to conclude one or more agreements on the terms and conditions stipulated by the option.

▫️ Option agreement – a mechanism that implies the right of one party to require the other party to perform actions specified in the agreement (e.g. to buy or sell an asset at a certain time at a predetermined price by entering into a sale and purchase agreement).

Pros and cons of a CLA:

▫️ a safer “refundable” investment method

▫️ allows financing of the “target”

▪️ CLA parties composition is limited

▪️ information on the CLA in relation to the LLCs is publicly available.

Pros and cons of options:

▫️ confidentiality

▫️ “automatic” exercise

▫️ unlimited composition of parties to the agreement

▪️ the investment is non-refundable.

Read more about all the pros, cons and legal requirements in our new alert attached.