Raising Your First Money: Convertible Loan or Equity?
Startups in Switzerland usually raise early-stage funding in one of two ways: A convertible loan or an equity round. Both can get you funding, but the right choice depends on several factors. Read below for more details!
What is a convertible loan and an equity round?
A convertible loan starts as debt. The investor lends money that may convert into equity later, commonly at the next equity round or upon a maturity date. Your company does not need to have a valuation. Convertible loans typically include i.a. conversion mechanics (i.e. how to calculate the shares the investor gets upon conversion), a maturity date, interest (sometimes very low or none) and repayment terms if no conversion occurs. Importantly, even if the loan is signed quickly, conversion into shares still requires Swiss corporate formalities, including a capital increase.
An equity round means you agree on a company valuation and issue shares now by way of a capital increase. This requires formalities such as various notarized shareholder and board resolutions, updated articles of association and registration in the commercial register. Investors become shareholders with equity immediately and will typically negotiate governance and economic rights through the investment documentation and a shareholders’ agreement. These rights may include information rights, anti-dilution protection, a board seat and a say in major decisions. The equity round can be very simple and straightforward, or more complex terms like liquidation and dividend preferences and different share classes can be implemented through corporate and/or contractual arrangements.
When is a convertible loan the better move?
Convertible loans are often advisable when:
- Valuation is hard to anchor: If you are pre-revenue, pre-product or still proving repeatable growth, a convertible loan can delay the valuation discussion until you have better data. Otherwise, you risk over- or undervaluation, which no startup wants.
- You need funding quickly: An equity issuance requires corporate actions and filings as well as multiple contracts. A convertible loan only requires an agreement and can often be signed and funded faster, with the heavier corporate work deferred to conversion.
- You need a bridge round: If you are between equity rounds, a convertible loan can extend your runway without reopening valuation debates.
- You want downside flexibility: With the right terms, including subordination, a convertible loan can be less disruptive if the company hits a rough patch.
When is an equity round the wiser choice?
You may want to choose an equity round when:
- You have strong traction and can defend a valuation: If you have meaningful revenue growth, signed contracts or clear demand from investors, pricing now can be advantageous. You lock in a valuation before markets shift and avoid a large conversion later.
- You want clean governance and clarity: Equity rounds force key decisions such as share classes and consent matters early. That clarity helps later rounds, particularly with institutional investors who want a clear cap table and well-defined rights.
- Investors may prefer a “proper round”: Many professional investors prefer an equity round because it gives them immediate shareholder status, negotiated protections and clear economics.
- You are raising a larger amount: The bigger the round, the more painful it is to keep the economics floating. Large convertible raises can complicate the next round’s cap table modelling.
How do we make the right decision?
Ask yourself:
- Can we credibly price today? If you can credibly measure valuation without over- or undershooting, equity can work. If valuation is mostly guesswork, a convertible loan buys time.
- How urgent is the close? If you need funding within weeks, a convertible loan is often faster. An equity round can still close quickly, but corporate steps and documentation usually take much more time.
- Who is leading the round? Angels may accept convertibles readily. Institutional leads often prefer equity, especially if they want governance rights and a clean ownership picture.
- How complex will conversion and the cap table become? Multiple convertibles with different caps and discounts can make the next round more complex. Sometimes, moving to an equity round sooner can reduce complexity.
The bottom line:
- Go with convertible loans when you are early, speed matters, valuation is uncertain and/or you are bridging to an equity round.
- Go with an equity round when you have traction, valuation is measurable, you are raising a meaningful amount, and/or you want governance clarity or are dealing with institutional investors.
Final words: A note on SAFEs in Switzerland
SAFEs are widely used in the U.S. and, unlike a convertible loan, are not a debt instrument. However, under Swiss law and practice, they are often treated as a convertible loan-style instrument. A U.S.-style SAFE template therefore cannot be used 1:1 in a Swiss financing context and needs careful redrafting to fit Swiss corporate law, conversion mechanics and tax constraints. In many Swiss financings, the practical result is that a SAFE becomes a contractual right that is implemented through the same steps as a convertible loan conversion.
