A convertible loan agreement represents one of the most commonly used instruments for financing startup companies in Serbia, particularly in the early stages of development when the company’s market value has not yet been clearly established. This type of agreement enables investors to initially provide financing in the form of a loan, with the option to subsequently convert their claim into an equity interest in the company.
In order to understand its legal nature, it is first necessary to consider the standard loan agreement, which is governed by the Law on Obligations. Under the provisions of this law, the lender undertakes to transfer to the borrower a certain amount of money or other fungible items, while the borrower undertakes to return, upon the expiry of the agreed term, the same amount of money or items of the same kind and quality. In commercial transactions, it is presumed that the borrower owes interest even where it has not been explicitly agreed, while for reasons of legal certainty it is always advisable to conclude the agreement in writing, although no specific form is prescribed by law.
On this basis, the convertible loan agreement has developed as a hybrid legal instrument combining elements of contract (obligations) law and company law. Its key feature is a pre-agreed possibility to convert the creditor’s claim into the company’s equity under specified conditions, most commonly at the time of a future investment round or another defined triggering event. In this way, the issue of company valuation is deferred, which is particularly important for startups that do not yet have stable revenues or a market-validated business model.
However, the application of this instrument in Serbia requires careful legal structuring due to the limitations arising from the Companies Act. Domestic law does not recognize automatic conversion of a loan into equity without conducting the appropriate corporate procedures. In practice, this means that, in order to implement the conversion, it is necessary to adopt the relevant corporate resolutions, carry out a share capital increase, transfer of shares, and register the changes with the Serbian Business Registers Agency. For this reason, the convertible loan agreement must contain precisely defined mechanisms that ensure its enforceability within the domestic legal framework.
Additional complexity arises in situations where the financing is provided by a foreign investor. In such cases, in addition to contract and company law, the rules on foreign exchange operations must also be taken into account. Borrowing by Serbian companies from non-residents is subject to specific regulations, including reporting obligations towards the National Bank of Serbia regarding the conclusion, performance, and any amendments of the loan agreement. Furthermore, the conversion of claims into equity may itself trigger certain regulatory implications. Non-compliance with these requirements may result in misdemeanor liability, which further highlights the importance of proper legal advice.
Notwithstanding these limitations, a convertible loan remains a highly useful instrument for financing startups in Serbia, as it enables relatively fast access to capital while allowing flexible structuring of the relationship between the investor and the company. Its successful implementation, however, depends on whether the agreement is properly structured and aligned with all applicable regulations.
In conclusion, although a convertible loan agreement may at first glance appear to be a simple arrangement, its legal and regulatory dimension requires a comprehensive approach. Timely consideration of all relevant aspects – from contract law, through company law, to foreign exchange regulations – is essential for mitigating risks and ensuring legal certainty for all parties involved.
Note: This text is for informational purposes only and does not constitute legal advice.
