DSIF invests through a convertible loan, this is a specific type of investment. With a convertible loan, initially, we’re actually not investing at all: we don’t buy shares and we don’t become a partial owner of the company. We are just handing out a loan which has to be paid back in a specific amount of time, with interest. The fact that this is a convertible loan, means that we can convert the outstanding loan into shares. The conditions on when we have the option to convert, just like the interest rate and other terms will be mutually agreed upon with the startup, and are part of the negotiation process.
Upsides of using a convertible loan
To buy shares in any company, you have to make a valuation of that company. For instance, you might say: I think your company is currently worth €1,000,000, so if I invest €50,000, I want 5% of the shares. Now valuating a company, just like valuating any other product, is no hard science. Rather, it is an opinion. The entrepreneurs might have a different opinion about this. The earlier stage the startup is in, the harder it is to make a reasoned valuation, since there will be no data such as market share, annual profits or number of customers to base it on. Writing out a convertible loan gives us (and the entrepreneurs) the chance to postpone doing the valuation. Initially, we will just hand out a €50,000 loan and that’s that. Then only if we choose to convert that debt into shares (for example 3 years later), we will have to agree on whether that €50,000 is worth 5% of the company, or only 2.5%. In other words: whether we value the company on €1,000,000 or €2,000,000. That is called deciding on the valuation to convert against.
So generally, convertible loans help us in investing in startups that are in a very early stage and dealing with all the uncertainty that comes with that. That is why the DSIF invests through convertible loans.