Convertible bonds - investment with attractive return potential
Convertible bonds are an increasingly popular form of financing for companies in the growth phase, in which the full potential cannot always be fully assessed. They combine an attractive interest rate with the obligation or option to convert the bond into company shares at a discount in the future. Depending on the structure of the convertible the interest is either converted, paid out at maturity or paid out during the term. The interest rate can either be paid out to the investors during the term of the convertible bond or at maturity or converted into shares of the company depending on the convertible bond terms. Investors thus have the opportunity to benefit from the future success of the company. A convertible bond can reduce the typical risks of an early-stage investment as the valuation is set in a future financing round.
Convertible bonds – interest payments with growth potential
As an investor, you receive interest which, depending on the contract, is either paid out or converted into company shares upon a conversion event. If the interest is paid out this can happen either annually or at the end of the term depending on the convertible bonds terms. If the interest is paid out annually this can happen either directly, after some time or following a specific event depending on the convertible bond terms.
Investors have the obligation or option, depending on the scenario, to convert the convertible bond into company shares at a future time. Depending on the convertible bond terms the convertible bond might have both an optional conversion event and a mandatory conversion event or only and optional conversion event. These conversion events are usually linked to a future funding event of a pre-decided funding amount but can also be linked to a future point of time. Depending on the convertible bond terms a convertible bond might continue as a plain bond if the investor chooses not to convert upon optional conversion but might also remain as a convertible bond.
Important conditions such as the interest rate, conversion discount, the conversion scenarios and the calculation of the conversion price (often dependent on a future financing round) are clearly regulated from the start.
Convertible bonds are of interest to investors who want to benefit from the potential increase in the value of growing companies in a scenario where the investors prefer to shift the valuation to a future funding round.
The most important features of convertible bonds
- Interest and conversion: As an investor in a convertible bond, you are entitled to interest during the term of the convertible bond which is converted into company shares upon conversion. In some cases, the interest is paid out during the term or at maturity. The convertible bond is usually converted during the term or at maturity under a conversion scenario which is either mandatory or optional. The conversion scenarios are clearly set out in the convertible bond terms.
- Mandatory or voluntary conversion: The convertible bond is converted into company shares either automatically (“mandatory conversion”) or when the investor decides to do so (“optional conversion”). You will find detailed information on this in the convertible bond terms of the respective investment opportunity.
- Conversion of the invested capital: Upon conversion, the invested capital is converted into company shares. Interest that has not yet been paid out is either converted or paid out fully or partly, depending on the conditions set in the convertible bond terms.
- Repayment at the end of the term: If no conversion takes place during the term or at maturity, the convertible bond together with any unpaid interest is repaid to the investors at the end of the term.
Examples of convertible bonds at Invesdor
PeelPioneers transforms citrus peel waste into valuable products. In doing so, the company contributes to sustainability and reduces waste in the food industry.
The convertible bond gives investors the opportunity to participate in the company's development at an early stage - with clear advantages: a fixed discount of 25% on the share price in the next capital increase, IPO or company sale, as well as a fixed annual interest rate of 10% over a term of 58 months. The convertible bond thus combines regular interest income with the opportunity for a possible increase in the value of the company.
Osgenic is a physician-led technology company committed to reducing preventable surgical errors through advanced, data-driven education. By integrating medical science with cutting-edge technology, Osgenic provides a problem-focused training platform that enhances surgical decision-making and technical skills, equipping doctors with the tools to improve patient outcomes.
Unlike traditional expert-driven medical training, Osgenic’s platform leverages real-world data to create immersive, clinically relevant learning experiences. This approach enables surgeons to gain in depth understanding of critical surgical steps in a risk-free environment, helping hospitals and universities improve surgical outcomes while reducing costs associated with complications.
The convertible bond offers a 10% annual interest rate over a term of 60 months and a 30% discount at conversion. The convertible bond had a mandatory conversion scenario and an optional conversion scenario. If a new capital round is raised to the amount of at least EUR 2,000,000 mandatory conversion is triggered. If a new capital round is raised to an amount less than EUR 2,000,000 optional conversion is triggered. In both scenarios both the invested capital and accrued interest is converted into shares of Osgenic. If no conversion event takes place during the term the convertible bond is repaid at maturity or, if the company is restricted to repay the convertible bond, the convertible bond together with accrued interest is converted at an EUR 800,000 floor valuation.
Notes on differences in individual countries
Convertible bonds work similarly throughout Europe. Nevertheless, there are differences in the conversion scenarios, interest payments, legal and tax rules depending on the country. These differences concern, for example:
- mandatory and optional conversion or fully optional conversion,
- paying out or converting interest,
- the approval process (for example, when issuing contingent capital),
- the tax treatment (e.g. how interest and profits are taxed),
- the rules for early repayment (such as deadlines and conditions).
Information on the respective conditions can be found directly in the individual convertible bond terms of the investment opportunity.
What should I look out for as an investor if I am interested in investing in convertible bonds?
- Understand the conversion conditions: Familiarize yourself with the convertible bond terms to gain an understanding of the terms under which the bond will be converted into company shares. Pay attention to the following points:
• Deadlines: Until when or from when is conversion possible?
• Conversion scenarios: Is conversion mandatory and optional, or only optional?
• Conversion ratio: How many shares will you receive for one bond?
• Conversion price: What discount do I receive when I convert?
Particularly important: Clarify whether the conversion is mandatory or voluntary. And when exactly it comes into effect.
- Assess the attractiveness of the investment opportunity:
Consider whether the investment opportunity is a good fit for your investment objectives. Understand whether the interest is converted into company shares or paid out and familiarize yourself with the interest rate, term and conversion discount.
- Assess risks individually:
Be aware of the risk associated with the investment and the company. Convertible bonds are generally riskier than plain bonds. Consider whether this suits your personal risk appetite.
- Read the KIIS and convertible bond terms carefully:
Read the Key Investment Information Sheet (KIIS) and the convertible bond terms carefully. There you will find information about the respective investment opportunity.
- Clarify legal and tax issues:
Seek legal or tax advice if necessary - especially if you are investing in a company abroad.
What are the conversion events for the bond? And how does the conversion work?
The outstanding amount of the convertible bond - i.e. the nominal value plus any accrued interest – can or must be converted into company shares or participation rights in accordance with the specified convertible bond terms.
Upon conversion, you as an investor receive a fixed discount on the reference price of a new financing round. This discount is determined at the beginning of the term and is an important advantage of your investment.
The possible conversion events are shown below in simplified form and by way of example. This overview is not exhaustive. The exact terms and conditions of the bond in the respective Key Investment Information Sheet (KIIS) are always binding.
Mandatory conversion
A mandatory conversion is an obligation to convert and means that the convertible bond is automatically and mandatorily converted into company shares as soon as one or more of the predetermined events occur. Depending on the convertible bond terms either only the principal or the principal together with accrued interest is converted. Typical examples of such events are
Qualified financing round: The company carries out a capital increase that exceeds a predetermined minimum amount (conversion trigger). The conversion takes place automatically. You receive the shares at a discount on the valuation of the new financing round.
Initial public offering (IPO): The company is listed on the stock exchange. In this case, the convertible bond is automatically converted in the course of the IPO or following a certain period of time on the stock exchange depending on the convertible bond terms.
At the end of the term (maturity date): Depending on the convertible bond terms the convertible bond might be converted into shares of the company at a pre-defined minimum valuation upon maturity if no conversion event has taken place during the term of the convertible bond.
You receive the company shares at a fixed discount on the issue price.
Optional conversion
An optional conversion event gives you as an investor the option (but not the obligation) to convert the convertible bond into company shares under certain predefined conditions. For example:
- Capital increase to a fixed extent: You receive the right to convert if the company carries out a capital increase, the amount of which is within a certain predefined range (for example, between a minimum and maximum amount). In this case, you will also receive the shares at a previously agreed discount on the reference price of this financing round.
- At the end of the term (maturity date): Depending on the convertible bond terms you might you have the right to convert your convertible bond, including accrued interest, into company shares at a discount at maturity instead of having the amount paid out.
Conversion price
The conversion price depends on the respective conversion event. In any case, holders of the convertible bond receive a discount on the then applicable share price.
Example 1:
An investor invests €100 into a convertible bond with a 10% interest per annum, 60-month term and 30% discount upon conversion. The investor carefully reads the convertible bond terms and realises that the interest will not be paid out during the term but converted into company shares at maturity. The investor further understands that a mandatory conversion event will take place if the company raises at least €2,000,000 in new capital and an optional conversion event will take place if the company raises less than €2,000,000 in new capital.
Four years later the company raises €3,000,000 in new capital at a €30,000,000 valuation which triggers the mandatory conversion event. The company has 3,000,000 shares outstanding equaling a price per share of €10. The investment is converted with a 30% discount on the valuation which is equal to [(1-0,3) * 30,000,000] = €21,000,000 valuation or [(1-0,3) * 10] = €7 price per share.
Since the interest rate was not paid out during the term of the convertible bond or at maturity the investors‘ investment has now grown from €100 to €140. This investment of €140 will be converted at a price per share of €7 giving the investor€140 / €7 = 20 shares in the company at a valuation of €21,000,000.
Since the interest was not paid out during the term the investor now holds a larger stake in the company and has the opportunity to reap the full potential of the future success of the company in a potential future exit event.
Example 2:
An investor invests €100 into a convertible bond with the same commercial terms as above. The investor carefully reads the convertible bond terms and realises that the interest will be paid out at maturity or upon conversion.
Four years later the company raises €3,000,000 in new capital at an €30,000,000 valuation which triggers the mandatory conversion event. The company has 3,000,000 shares outstanding equaling a price per share of €10. The investment is converted with a 30% discount on the valuation which is equal to [(1-0,3) * 30,000,000] = €21,000,000 valuation or [(1-0,3) * 10] = €7 price per share.
The investment has grown from €100 to €140. Since the interest will be paid out upon conversion €40 will be paid out in cash and €100 will be converted into company shares at a price of €7 per share giving the investor €100 / €7 = 14,25 shares in the company. Since partial shares cannot be given the investor will receive 14 shares in the company at a valuation of €21,000,000 and the remaining value of 0,25 will be paid out as additional interest. Since the interest was paid out at maturity the investor will receive fewer shares and a potentially lower ultimate return on the investment compared to a scenario where the interest rate is not paid out. On the other hand the risk is also comparatively lower as the investor receives a portion of the return at conversion and potentially the remaining investment at a future exit event.
Convertible bond calculator
Enter your investment amount, interest rate, term, discount, and an assumed company valuation at conversion. Choose whether the interest should be converted into shares or paid out in cash, then click "Calculate" to see how your investment would convert based on the selected terms.
FAQ: Convertible bonds
The conditions for the benefits (the so-called “discount”) when converting your convertible bond can be structured differently. Two variants are common:
- Reduced share price: Investors receive company shares at a reduced price, for example with a discount of 30% on the reference price of the relevant financing round.
- Pre-determined number of shares: It is determined from the outset how many company shares you will receive per bond invested, for example ten shares per convertible bond.
The company clearly specifies which variant applies in the convertible bond terms.
Yes, convertible bonds are securities and can generally be transferred. However, there is currently no regulated stock exchange trading and no active secondary market for these bonds.
No, a custody account or safe deposit box is not required as the company shares are not securitized.
The time of conversion is regulated in the convertible bond terms. This is usually a a specific event, such as reaching a financing round, or a fixed date. The conditions can be found in the respective convertible bond terms.
Investors should check whether capital gains tax or other tax charges are payable on conversion. If necessary, seek advice from a tax advisor.
Do you have any further questions?
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