Convertible Loan – the Belarusian Perspective: Opportunities for Start‑ups and Protection for Investors

A convertible loan is a flexible way to attract capital without immediately giving up equity. This instrument is gaining popularity in Belarus — both among startups and mature companies in need of funding. It allows investors to act as creditors initially, with the possibility to convert the loan into a share in the company’s charter capital under pre-agreed terms.

In times of market uncertainty, this mechanism supports business growth without loss of control and helps investors mitigate risks. We will explore how this legal instrument operates and what key aspects to consider when drafting it.

Legal Nature of a Convertible Loan under Belarusian Law

Under Belarusian law, a convertible loan agreement implies that one party (the lender) provides funds to another party — the borrower (always the target entity).

The borrower, upon the occurrence of a condition specified in the agreement or upon performing certain actions (either directly or through third parties), is obliged to:

• transfer to the lender shares (in the case of a JSC or CJSC) or participatory interests (in the case of an LLC or PE) previously acquired from other shareholders;
• or issue new shares (for JSCs or CJSCs) or increase the charter capital by making the lender’s contribution (for LLCs or PEs).

At the same time, the lender is released from the obligation to repay the loan, unless otherwise agreed by the parties. In other words, the outcome of a convertible loan should be the acquisition by the lender of securities or participatory interests in the company, rather than repayment — unless explicitly stipulated otherwise.

We view this instrument not only as a means of capital raising but also as a versatile tool for business development that helps investors reduce potential losses. This type of loan is used in situations where the funds are needed by the company itself, not its shareholders (a so-called cash-in transaction).

Instead of debt repayment, the investor receives an ownership stake. This approach allows postponing the final decision — whether to become a participant in the company or demand repayment. In practice, this mechanism is applied in the following cases:

• Startups and venture capital – Solves the issue of valuing young companies with no stable revenue by allowing the investor to provide funding first and convert the loan into equity based on performance;
• Risk mitigation for investors – Reduces potential losses in uncertain projects by granting creditor status with the option to become a shareholder if successful;
• Financing growth in established companies – Suitable for scaling or development where traditional lending may be too costly.

Pros and Cons

For the Borrower (the Company)

For the Lender (Prospective Shareholder)

Conclusion

A convertible loan is a convenient and secure instrument for investing in startups and promising ventures. The investor can either acquire a stake in the company upon success or recover their funds if the project fails.

We always recommend carefully drafting the agreement to minimise risks for both parties. It should clearly define:

• the conditions and triggers for conversion (e.g. reaching certain KPIs);
• scenarios where the lender may demand repayment instead of equity;
• deadlines for equity transfer;
• transfer pricing;
• interest payment terms (if applicable and relevant to the equity size).
• A well-drafted agreement protects the interests of all parties and increases the efficiency of the investment process.

Authors: Shastsiarniou Matsvei, Tolkanitsa Nikita

The material has been prepared for MYFIN

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