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Convertible loan: a new opportunity for startups and investors

The interview with lawyer Dejan Aleksov is for the occasion of the latest amendment to the Law on Trade Companies which introduces the opportunity to invest in companies through a loan given by a third party, that is, an investor, which is later transformed into a share in the company.

What are the benefits and new opportunities for the investors with the adopted amendment to the Law on Trade Companies which, de facto, allows the convertible loan?

Young and innovative companies have great potential for rapid growth (due to the innovation they bring to the market); however, many of them do not succeed and fail.

Under such conditions, the investors that invest in these companies and receive a share become part of the ownership structure of a company that is likely to fail, and thus, bear the brunt of the closure processes.

The advantage of this investment mechanism is that it will allow the investors to invest their funds as a loan, and then within 3 years, to assess whether to transform them into a share and become part of the ownership structure or the loan to be treated as debt.

Another advantage is that, at the beginning, it is very difficult to assess the value of the young company, so investors find it more difficult to assess how much their investment is worth. This way they will be able to make that decision at later stages.

What was the main obstacle you faced as a lawyer in conducting investment procedures, especially in startup companies, and how did that lead to your involvement in drafting the amendment to the Law on Trade Companies?

Almost all investments so far have been made through a procedure of “increasing the nominal capital” of the company, where investors get new shares, so with the payment of the funds they immediately become part of the ownership structure.

From a formal and legal point of view, there are no obstacles, but there are risks for the investors, in the sense that at the beginning, it is very difficult to assess whether a company will be on the right path or not. We are talking here about investments in companies that are in the initial stage of an idea or are newly established, that are yet to test their product or service.

As the co-founder of Startup Macedonia, we took the initiative to introduce this change, because this investment mechanism exists in the world and is one of the basic mechanisms used in such type of investments.

As a lawyer who runs a law office focused on startup companies and investments, what is your opinion on the development of micro and small companies, but also the business community in general in the Republic of North Macedonia with the adoption of this amendment to the Law on Trade Companies?

With the adoption of this amendment, we hope for better access to finance for young innovative companies, and at the same time better protection for investors. It is too early to say because the practice is yet to be built, but we hope for success stories that will motivate and inspire diversification of investors’ private wealth in such type of investment.

 

Lawyer Dejan Aleksov will hold a consultation on June 23rd, 2022 in the premises of Akademik DOOEL Skopje where he will explain this topic in more detail, and attendees will have the opportunity to ask questions and discuss the legal solutions regarding the convertible loan.

 

Translated by: Emilija Kuzmanovska