Negotiating a convertible loan: how cap and discount look from the investor's side of the table

There are good explainers on convertible loans in Germany, first among them the Bitkom Startup Legal Guide: what cap and discount are, why the instrument is so common in early stages. We do not need to write that text again. What is missing is the perspective of the party that signs the paper: how do the numbers get set, what is negotiable, what is not, and what actually makes conversions fail? The convertible loan is one of our four routes into an investment, and in the Knowledge for Equity model it is the component that turns delivered work into shares. Here it stands on its own.

Why we convert instead of taking equity directly

The honest reason is unromantic: a convertible loan postpones the most expensive discussion of the early stage, the valuation discussion, to the moment when there is data for it. Fixing a number today for a company that is still finding its market is guessing with a signature. The next serious financing round delivers the number, and the loan converts at exactly that valuation, corrected by cap and discount. Add what Bitkom also names as a strength: the cap table stays lean, execution is fast and cheap, and nobody has to see a notary for a bridge before it is clear the bridge is needed at all. In our model the instrument has a second job: when we enter with work instead of money, the accepted work is not paid out but left standing as a loan. How that work is priced is covered in our article on valuing work for equity.

Cap and discount: what the market does and where we sit

The discount rewards whoever took risk early: it lets the loan convert at a markdown on the next round's valuation. The cap draws a ceiling so that an early backer is not diluted by the company's own success. So much for the mechanics. On the numbers, the industry gets dishonest: ranges for market-standard discounts and caps circulate everywhere, but a robust, publicly checkable data base for the German-speaking seed market does not exist. So we do not quote a market range we cannot source, and we distrust anyone who quotes one without showing where it comes from.

What we lay open instead is the derivation. Our discount is a function of time and risk: the longer money or work is exposed before the round arrives, the larger the markdown, and it is justified once rather than haggled over. The cap is not a wish valuation; it is derived from the last robust number the company has: the previous round, a defensible revenue multiple, or, failing both, the replacement cost of building the same state today. The concrete figure belongs in the term sheet and is derived in the room, not fixed in a blog post. And one rule applies in both directions: when our work converts, it converts on the same terms as outside money in the same position. There is no sweat equity discount, not even for us.

The clauses we do not negotiate, and why that saves everyone time

A term sheet in which everything is negotiable costs both sides weeks. So we keep a short list of points that are fixed, and we say so in the first conversation. The qualified round that triggers conversion is defined precisely, with minimum volume and deadlines; a vague trigger clause is a dispute with an appointment. Only what has been delivered and accepted converts, not what was promised; the proof of performance with monthly acceptance is the core of the model and protects the team as much as us. The full statement is on the table for all shareholders before anything is signed, because a clause that surprises a co-shareholder becomes everyone's problem in the next round. And the loan is built as a route into ownership, not as leverage: whoever insists on repayment at maturity as a realistic scenario actually wants a bank loan, and banks exist.

The no to negotiating these points is not a power play. Each clause is the answer to a conflict we want to avoid before it gets expensive, and experience says: those who accept them sign faster, and those who will not would have fought at exactly these spots later. The criteria by which we enter a company at all are described in how our investment committee decides.

How conversions actually fail in practice

Bad faith is the rarest cause. The most common case is plain: the qualified round never comes, the company grows on its own cash or not at all, and at maturity there is a loan nobody can repay and nothing to trigger. The contract needs an answer to that from day one: conversion at maturity at a fallback valuation defined in advance, not an extension in the hope the problem dissolves. The second case is definitions that allow two readings in hindsight, from which round qualifies to whether interest converts too. The third is a cap table that has collected so many small convertibles on different terms over the years that the new round has to do archaeology first; that, too, argues for few, identically built instruments. The fourth is form, and that one deserves its own heading.

The form question: why we notarize even though it is contested

Whether a convertible loan with a conversion obligation must be notarized in Germany is not conclusively settled; Rödl & Partner have written up the state of the debate and the practical recommendations. You can treat that uncertainty sportingly and bet on form freedom. We do not. Notarization costs a few hundred euros and an appointment; a contract that turns out to be void on formal grounds years later can, in the worst case, cost the very stake our entire engagement rests on. That trade is so lopsided that we do not reopen it each time. Whoever signs a convertible with us signs it at the notary, even when their own lawyer considers form freedom defensible. Defensible is not enough for us at this particular spot.

If you have a convertible loan on the table right now and cannot see how its numbers were derived: ask, with us as with anyone else. And if you want to discuss one with us, show us what you are building.

Note: this article is an entrepreneurial assessment, not legal or tax advice. The concrete structure of any convertible loan belongs with a lawyer and a tax advisor; the debate cited reflects the position as at August 2026.