The essentials
- The convertible defers the valuation to a future round, with a discount and often with a cap.
- The participating loan (Art. 20 of Royal Decree-Law 7/1996) is debt with interest tied to the business; it does not dilute, but it has to be repaid.
- A capital increase sets the price today: simpler to explain and harder to agree.
- For an issuance aimed at customers, being understandable wins: the instrument your customer doesn't grasp is the one they won't subscribe to.
The convertible: deferring the price
A convertible loan comes in as debt and converts into shares when an agreed event occurs, normally the next funding round. The idea is simple: nobody wants to argue today about what the company is worth, so the argument is postponed and the investor is compensated for having come in earlier.
That compensation takes two forms, almost always at once.
- A discount on the price of the future round, usually between 15 and 30 %.
- A valuation cap, which sets the maximum value at which it will convert even if the round closes well above it.
In Spain the usual instrument is a convertible loan executed as a public deed, not the American SAFE: the SAFE was created for a different body of corporate law and transplanting it directly creates problems of fit.
The participating loan: debt that behaves like a shareholder
It is a loan with two interest tranches: one fixed and one variable, determined by how the borrowing company's business performs. It is governed by Article 20 of Royal Decree-Law 7/1996 of 7 June, and that is where its three defining features come from.
- For the purposes of capital reductions and the winding-up of companies it counts as net equity, which strengthens the balance sheet without diluting the shareholders.
- In the ranking of claims it sits behind ordinary creditors.
- It can only be repaid early if that repayment is offset by an increase of equal amount in the company's own funds, and provided that increase does not come from the revaluation of assets.
It is the instrument used by several public financing programmes for young companies.
The obvious advantage: it does not dilute. The equally obvious drawback: it has to be repaid, and the repayment schedule competes with the working capital of the business.
The capital increase: setting the price today
The investor enters the share capital at an agreed valuation. There is no pending conversion, no maturity, no debt. In exchange, you have to agree today on what the company is worth, which is exactly the conversation the convertible avoids.
For a company with no revenue, that conversation is speculative and usually ends badly for one of the parties. For a company with recurring sales, on the other hand, there is a basis on which to defend a number, and then the simplicity of the instrument works in your favour.
The three, side by side
| Convertible | Participating | Capital increase | |
|---|---|---|---|
| Nature | Debt that converts | Debt | Equity |
| When the price is set | At the future round | Not applicable | Today |
| Dilutes | On conversion | No | On entry |
| Has to be repaid | Only if it doesn't convert | Yes | No |
| Recurring cost | Interest until conversion | Fixed and variable interest | None |
| Complexity for the investor | High | Medium | Low |
| Fit with a retail investor | Poor | Poor | Good |
What fits an issuance aimed at customers
Here the answer narrows a lot, and not for financial reasons but for reasons of comprehension.
A customer investing two hundred euros in the brand they like is not going to read a conversion agreement with a discount and a cap. If the instrument doesn't fit into two sentences, it doesn't get subscribed: the friction turns into abandonment in the form. Direct shareholding, with a clear price and a position that can be checked at any time, is what works.
There is also a regulatory reason. An issuance aimed at retail investors rests on an issuance document that an authorised entity validates precisely to make sure the information is understandable. A complex instrument makes that job harder, slower and more expensive.
Frequently asked questions
Can I use a SAFE in Spain?
The SAFE is a contract designed for American corporate law and transplanting it literally creates problems of fit in Spain. What is normally used here is a convertible loan executed as a public deed, which performs a similar function within a framework that does fit.
Does a participating loan count as own funds?
Article 20 of Royal Decree-Law 7/1996 establishes that, for the purposes of capital reductions and the winding-up of companies, it counts as net equity, which helps support the balance sheet. It is still debt that has to be repaid, and in the ranking of claims it sits behind ordinary creditors.
What happens to a convertible if there is never a next round?
It depends entirely on what the contract says. The well drafted ones set a maturity and a default conversion valuation, so the instrument resolves itself. The ones that don't leave an enforceable debt on the balance sheet of a company that has precisely failed to raise more capital.
Can I combine several instruments in the same transaction?
Yes, and it is common: a professional tranche with a convertible or with negotiated terms, and a community tranche with direct shareholding. What has to be resolved beforehand is how the two interact on the cap table and in the issuance document.
Legislation and sources cited
- Royal Decree-Law 7/1996 of 7 June on urgent tax measures and measures to promote and liberalise economic activity (BOE-A-1996-13002). Art. 20, participating loans.
Updated 16 Sep 2026. This article is for general information and does not constitute legal or financial advice. The specific terms of each transaction depend on its structure and should be reviewed with professional advice.
