CLA & SAFE

⚡tl;dr a cla is a middle ground between equity financing and a traditional loan it's a quick and efficient way to raise money if you don't have a valuation yet or are between financing rounds beware of the 10/20 rule use discounts and interest to your advantage when negotiating with investors book a free call with us what is a cla? a convertible loan agreement ( cla ) is a flexible option that falls between equity financing and traditional loans it offers several advantages, including quick and cost effective easier and faster to set up than equity financing no repayment required no need to repay the loan or interest future conversion converts at a later valuation, providing a fair link between investment amount and ownership stake clas are also known as simple agreement for future equity (safes) when to choose a cla instead of a financing round? you should consider a cla if valuation uncertainty you can’t set a valuation yet a cla allows you to postpone this discussion and access funds immediately need for speed a cla can be established quickly, making it ideal for getting funding quickly bridging funding rounds you're between your seed and series a rounds and need more time to boost your valuation (e g , 3x) before looking at your series a a cla can help bridge this gap what is the 10/20 rule? under swiss tax law, interest paid on bonds and similar debt instruments of swiss companies is subject to a 35% federal withholding tax under certain circumstances, clas may be considered bonds for tax purposes and trigger the withholding tax a cla may be considered a bond for tax purposes and trigger taxes if cumulatively the company enters into loan agreements with more than 10 ‘non banks’ or institutional investors sharing substantially identical commercial terms; or with more than 20 ‘non banks’ or institutional investors, regardless of the terms (even if some have no discount while others do); and the total amount invested exceeds chf 500'000 example let's say startup x force issues 15 clas to private angel investors and raises chf 1,000,000 all clas have the same terms, including an interest rate of 5% after one year, the total loan amount grows to chf 1,050,000 due to interest the loan, including interest, is converted into shares at a specified conversion rate since x force has issued more than 10 loans with identical terms and conditions, exceeding the total investment limit of chf 500,000, these loans qualify as "bonds" for swiss withholding tax purposes when the chf 1,050,000 loan is converted into shares, the swiss tax authorities will treat the chf 50,000 interest as only 65% of the total interest amount this means that they will demand an additional chf 27,000 from x force normally, x force will not be able to recover this amount from the investors best practices 10/20 rule if the total amount invested through clas exceeds chf 500,000, no more than 10 clas with substantially identical commercial terms or no more than 20 clas regardless of commercial terms may be concluded key provisions investment amount this is the total amount of money you’ll receive from the investor trigger events these are the events that trigger the conversion (or transfer of shares to the investor) standard trigger events are qualified equity financing the company raises significant funds in the next funding round, resulting in new shares being issued immediately to new investors liquidity event the company is sold through an m\&a process or goes public with an ipo maturity date a predetermined date on which the cla automatically converts if no other trigger event has occurred valuations and discounts the number of shares that the investor receives for their investment is based on the company's valuation the appropriate valuation depends on the event triggering the conversion in the case of a qualified equity financing round or liquidity event , the parties typically use the same valuation for new investors and cla investors however the risk taken by the cla investors (who invested earlier) is compensated by a discount rate, typically ranging between 10 and 25% (i e , the investor receives a lower share price, meaning they get more shares for the money); a valuation cap is often negotiated to ensure that cla investors receive a pre defined minimum percentage of equity in the company a specific maturity valuation is usually set for conversion at the maturity date interest since the cla is a type of loan, it may accrue interest, which is usually converted into equity this can be used to incentivize investors to accept a lower conversion rate discount a discount works like an interest rate by giving investors more shares at conversion than those who invest later essentially, it's an interest rate based on equity rather than cash psychologically, the discount plays a critical role in motivating investors to commit early through a cla cash redemption option the company might keep the option to reimburse the loaned amount in cash instead of with shares best practices discount the discount, if granted, is between 10% and 20% interests loan interest is either 0% or between 1 3% if the loan is granted by a related party (e g a shareholder), the interest rate will not exceed 3 5% in order to avoid tax complications cap table the cap table is up to date, includes the clas entered into and shows the future impact of the cla on the cap table (in particular the dilution) y combinator safe template we strongly discourage the use of the ycombinator safe template or any other template found online in fact, the y combinator template (and, in general, most similar agreements) is not tailored to swiss law while it may feel like an additional investment, drafting a swiss based agreement will ultimately prove to be more cost and time efficient how do i get this done? book a free call to discuss our flat fee cla package read more on the lexr blog https //www lexr com/en ch/blog/funding round convertible loan/ https //www lexr com/en ch/blog/funding round convertible loan/https //www lexr com/en ch/blog/simple agreements for future equity/ https //www lexr com/en ch/blog/simple agreements for future equity/ https //www lexr com/en ch/blog/10 20 rule for convertible loans/ https //www lexr com/en ch/blog/interest rates and discounts in convertible loans/ https //www lexr com/en ch/blog/interest rates and discounts in convertible loans/