Why convertible loans are widely used among Swiss SMEs
The convertible loan — also known as a CLA (convertible loan agreement) — is a hybrid financing instrument widely used by startups and growth-stage SMEs in Switzerland. The investor provides capital with the prospect of converting it, at a future date and under pre-agreed conditions, into equity interests (shares in an LLC or stock in a corporation) rather than being repaid in full in cash.
For the company, the advantage is twofold: it obtains immediate liquidity without immediately diluting share capital and defers the company valuation until conversion or a trigger event (investment round, maturity, exit). For the investor, the loan offers downside protection — interest and repayment priority — with an option to participate in the upside through conversion.
In Switzerland, the convertible loan is not governed by a specific provision of the Code of Obligations (CO), but falls under the contractual law of loans (Art. 312 et seq. CO) and the applicable corporate law provisions (LLC: Art. 772 et seq. CO; corporation: Art. 620 et seq. CO). The contractual structure, conversion and accounting must be carefully planned to avoid conflicts with the articles of association, tax issues and incorrect accounting entries.
Contractual structure: essential elements of the CLA
A well-drafted convertible loan agreement precisely defines the rights and obligations of the parties. Here are the typical components that every SME should negotiate and document:
| Contractual element | Typical content | Practical relevance |
|---|---|---|
| Amount and disbursement | Single or multiple tranches, disbursement conditions | Defines the increase in liquidity and the initial financial liability |
| Interest | Fixed or zero rate (PIK), optional capitalisation | Affects tax deductibility and the convertible amount |
| Maturity | Fixed term (12–36 months) or linked to an event | At maturity: mandatory conversion, extension or repayment |
| Valuation cap | Maximum implicit valuation for calculating the conversion price | Protects the investor in the event of a high valuation at the round |
| Discount rate | 10–30% discount on the price of the next round | Compensates the investor for early-stage risk |
| Trigger events | Qualified financing, exit, default, IPO | Determine when and how conversion takes place |
| Subordination | Ranking relative to other creditors and banks | Relevant in the event of insolvency or restructuring |
| Protection clauses | Information rights, approval for extraordinary transactions, MFN | Limit governance but increase investor confidence |
Legal aspects: LLC, corporation and articles compliance
The legal form determines the conversion mechanics and formal requirements:
Conversion into an LLC (GmbH)
Conversion involves either an increase in share capital or the acquisition of existing shares. If share capital is increased, a capital increase with contribution in kind or set-off of claims is required (Art. 781 CO, with the rules on corporations applied by analogy), a public deed, a certification report and registration with the Commercial Register.
Shares in an LLC are registered shares (min. CHF 100 each, Art. 774 CO) and their transfer requires approval by the shareholders' meeting (Art. 786 CO), unless the articles of association provide otherwise. The CLA must provide that existing shareholders waive their pre-emptive rights or that the capital increase takes place with exclusion of pre-emptive rights (Art. 652b CO, applicable by analogy pursuant to Art. 781 para. 5 CO), for valid reasons and with a qualified majority.
Conversion into a corporation (AG)
In a corporation, conversion typically generates new registered shares: since 2023, bearer shares are permitted only for listed companies or if issued as book-entry securities under Art. 622 para. 1bis CO. A share capital increase requires a resolution of the general meeting, a capital increase report and, for contributions in kind or set-off of claims, verification by a licensed auditor (Art. 652e–652f CO).
Corporations are the preferred form for rounds with institutional investors and business angels, thanks to greater flexibility in share structure (share classes, options) and a well-established legal framework for capital increases and transactions with investors.
Regardless of legal form, verify that the convertible amount does not result in share capital below the legal minimum (CHF 20,000 for an LLC, CHF 100,000 for a corporation) and that the company is not in a state of over-indebtedness (Art. 725 CO) at the time of conversion.
Conversion mechanism: calculation and procedure
Conversion transforms the investor's claim into an equity interest. The number of shares allocated depends on the pricing method agreed in the CLA, generally the one most favourable to the investor between the valuation cap and the discount rate applied to the price of the qualified round.
Simplified example: an investor has provided CHF 200,000 with a valuation cap of CHF 2 million and a 20% discount. At the qualified round, the company is valued at CHF 4 million pre-money. The cap imposes an implicit price of CHF 2 million: the investor receives shares on proportionally more favourable terms than the investors in the round. If the valuation were CHF 1.5 million instead, the 20% discount would be applied to the round price.
Operational steps at conversion
- Verify the trigger event and calculate the number of securities in accordance with the CLA
- Convene the shareholders' / stockholders' meeting for the capital increase with exclusion of pre-emptive rights
- Prepare the public deed of capital increase and update the articles of association if necessary
- Prepare the capital increase report and verification certificate for contribution in kind or set-off of claims
- Register the capital increase with the Commercial Register and update the register of shareholders / shares
- Extinguish the liability in the accounts and record the increase in equity
- Declare and pay any federal stamp duty due and comply with any applicable cantonal tax obligations
Compliant accounting: from Swiss accounting standards to conversion
Under Swiss accounting standards (Swiss GAAP FER / Code of Obligations), treatment varies depending on the stage of the loan:
| Stage | Accounting treatment | Typical account (Swiss GAAP FER) |
|---|---|---|
| Disbursement | Recording of the financial liability at nominal value | D: 1020 Bank / C: 2400 Bank and financial liabilities |
| Interest accrual | Periodic charge to income statement (or capitalisation if provided for) | D: 6800 Interest expense / C: 2400 or 2300 Liabilities |
| Before conversion | Short-term or long-term liability, depending on maturity | 2400 (short-term) or 2500 (long-term) — verify annual classification |
| At conversion | Extinguishment of debt and recording to equity / share premium | D: 2400 / C: 2800 Share capital + 2900 Share premium reserve |
| Equity component (IFRS) | Companies applying IFRS may need to separate the debt and derivative components | Fair value measurement — rare in SMEs, relevant for scale-ups |
For most Swiss SMEs applying Swiss GAAP FER (PME or RPCC), the convertible loan remains classified entirely as a financial liability until conversion. Separate valuation of the option component is not required, unlike IFRS 9 for compound instruments.
If at conversion the value of the equity interests exceeds nominal share capital, the difference is allocated to the share premium (contribution reserve). Direct costs of the capital increase (notary, stamp duty) may be charged to share premium if permitted by law and the articles of association, otherwise to expenses.
Document the resolution of the general meeting, the public deed and the exchange ratio calculation in the general ledger. In Accountex, record the transaction with the date of registration in the Commercial Register to ensure consistency between accounting, financial statements and the Commercial Register.
Tax implications: interest, conversion and withholding tax
Company side
- • Accrued interest is generally deductible from taxable income, provided the rate complies with the arm's length principle
- • Zero-coupon interest does not generate a deduction until eventual capitalisation or conversion
- • At conversion, no taxable income arises for the company: it is an internal accounting reclassification of the liability into equity
- • Federal stamp duty (1% on equity interests issued, with a cumulative allowance of CHF 1,000,000 under Art. 6 Stamp Duty Act) may apply to the capital increase, with further exemptions for qualifying transactions
Investor side
- • Interest received is investment income / income from business activities, taxed according to the investor's situation
- • The 35% withholding tax (WHT) applies to interest on bonds and similar financing; it generally does not apply to typical private convertible loans, unless qualified as a bond or collective financing
- • At conversion, the investor acquires an equity security: the acquisition cost typically corresponds to the amount originally provided plus capitalised interest
- • Future capital gains on the sale of shares/stock are taxed according to the applicable cantonal rules (private vs. commercial)
Risks and best practices for entrepreneurs and CFOs
A poorly structured convertible loan can lead to surprises at the next round: excessive founder dilution, conflicts with banks that require seniority, or inability to convert due to non-compliant articles of association. Here are the most effective preventive measures:
- 1
Model dilution scenarios
Before signing, model the impact on the cap table with different round amounts and valuation caps. Tools such as cap table spreadsheets or dedicated modules in Accountex help visualise the founders' stake post-conversion.
- 2
Coordinate with senior creditors
Inform the main bank and obtain any contractual waivers. Many bank credit agreements restrict the assumption of subordinated debt without consent.
- 3
Include alternative repayment clauses
If conversion does not occur (failed round, trigger not met), define whether the loan is repaid, extended or mandatorily converted at a pre-agreed valuation.
- 4
Align contract, articles and accounting
The CLA, corporate resolutions and accounting entries must reflect the same transaction. Discrepancies complicate legal audits, investor due diligence and tax returns.
Managing convertible loans with Accountex
Accountex simplifies the accounting and administrative management of convertible financing for Swiss SMEs. From recording the disbursement to reconciling interest, through to the conversion transaction with automatic adjustment of the liability and allocation to equity, every step remains tracked and documented.
The shareholder register allows you to monitor equity interests before and after conversion, while balance sheet reports correctly reflect the short-term/long-term classification of the debt. For fiduciary firms assisting multiple clients, multi-entity functionality and attached documentation facilitate audits and preparation of notarial deeds for capital increases.
A well-contracted and rigorously accounted convertible loan is an effective tool for financing growth without immediately sacrificing corporate control. The key is to plan conversion, compliance and tax from the signing of the CLA — not only at the time of the round.