The instrument
The convertible note: your entry into the startup.
The idea, in a few words. The money you contribute is, at first, a loan to the startup. You enter one of the project's seven rounds; when the startup completes that round, it converts your loan into a stake. And when converting, it takes as reference the value the company had on the day you put in the money, not the value it has that day: the price of your stake is fixed from the start, and everything built afterwards goes into your share. The startup keeps one alternative: instead of converting, it may return your capital with 10% for each year it has held it; it can only do so as long as the conversion has not been triggered. This page says the essentials; the detail for your adviser is in the terms PDF, at the end.
9 min read
To read this page: why invest capital in Volcano · the Tax Lease and the AIE · the simulation of the private investment.
What it is
A loan that converts into a stake at the price of day one.
What happens to your money. It enters the startup as a loan, without interest. The startup uses it to build the project. When the startup completes the round you entered (it crosses the gate of its last phase), the loan converts into a stake. The share that belongs to you was calculated on the day of signing, with the value the company had then: contribution ÷ (starting value + tax investors' capital + notes that convert). That value is not renegotiated afterwards.
The startup's alternative. As long as your round has not been completed, the startup may choose not to convert and return your capital plus a simple premium of 10% for each year elapsed: 1.10× in the first year, 1.20× in the second, 1.30× in the third. Once the conversion is triggered, that option disappears and you are a shareholder, with no cap. And if the project does not reach the market and is sold as know-how, the private investor is paid before the founders and before Volcano: the section on the sale details it.
What there is not, and why. There is no discount and no cap, because they are not needed: in market notes they are negotiated to compensate for the valuation being set in the next round; here it is set on day one. There is no interest, because accumulating it would hurt the startup at its most delicate moment (the section on rank explains it) and would generate taxes without cash for you. It is not offered in every project: only when grant funding and tax capital do not cover the whole cost, typically in technological innovation with corporate co-financiers. If it is offered to you, your capital is necessary. The reasons to come in are in invest capital.
Calculate your position
Your share, your premium and your waterfall, with the rules of the note.
Your stake is your contribution divided by the pre-money valuation (the project's starting value plus the tax investors' capital) plus the notes that convert. In the reference case, 500,000 € on a pre-money of 1,000,000 € give 33.3%. Four figures are enough: the project's starting value, the tax investors' capital in the AIE, the total of the notes that convert and your contribution. They start from the reference case; replace them with those of your operation, which are set in the allocation table of the closing. Below, what you would collect if the startup were sold before converting, at a price and in a year you choose.
Including yours. All convert pari passu with the same formula.
Your position
- your stake, fixed on the day of signing
Who is paid what, in that sale
Formula, simple premium of 10% per year and waterfall: the rules on this page. The amounts of your operation are set at the financial closing. Indicative and not binding.
When it converts
On completing your round; earlier, if the project is sold.
1 · The close of your round
You enter one of the project's seven rounds. Each round covers whole phases and is completed when the gate of its last phase is crossed: round 1, for example, runs from the start of F3 to the end of F5, the proof of concept. At that moment your note converts, the buyback window closes forever and you are a class A shareholder at the formula's share. The seven rounds, with their entry, close, size and multiple, are in the rounds. The contract also sets a deadline (the longstop): if the round were not completed, the note converts on that date anyway.
2 · A sale, including that of the know-how
If the project does not reach the market and is sold (the whole startup, or its know-how), the sale converts the note and you are paid with priority: of what is collected, you receive the greater of two amounts, your share of the price or the buyback premium you would be due that year. Never more than what is distributed. Only the remainder goes to the founders and to Volcano. With the second-year premium (600,000 € on 500,000 €) and the 33.3% share of the reference case:
| Realised sale price | What you receive | Reading |
|---|---|---|
| 600.000 € | 600.000 € (+20%) | The funds do not cover the premium: you receive them in full and class B gets zero |
| 1.000.000 € | 600.000 € (+20%) | The premium still dominates the proportional share (333,333 €) |
| 1.800.000 € | 600.000 € | Crossover point: share and premium coincide |
| 2.000.000 € | 666.667 € (+33%) | From here the proportional share prevails |
| 3.000.000 € | 1.000.000 € (+100%) | No cap: the share grows linearly with the value |
With the third-year premium (650,000 €) the crossover point moves to 1,950,000 €. If no sale intervenes and the note converts on completing your round, you share without cap in any future value. The capital is not guaranteed in the banking sense; what is guaranteed are the rules and the window in which each applies.
The process
From first contact to signing, and after.
The commercial process has five steps and each one delivers a document. Qualification: a few questions in start here, without sensitive data, to understand profile, horizon and intention. The session: a technical video call about the project, the structure and the calendar; you receive the full Guide to the structure, with the private investor's position, the risk matrix and the status of the binding tax rulings. The simulation of your case, with the figures of the specific operation. The letter of intent, non-binding. And the closing, coordinated with the AIE's tax year: closings concentrate between October and December, because the tax investors must be partners on the closing date of the year, and the three subscriptions (tax capital, note, loan to the AIE) are executed together, with the pre-money determined in that act. Before the first euro, the project has already passed the ex ante certificate and obtained the binding reasoned report.
What you receive, besides the contracts. A quarterly progress report; access to the certification dossier (ex ante and ex post certificates, reasoned report, expense audit and allocation table), to the expert appraisals and to the contracts of the structure. Verifiability is independent by design: milestones are attested by a third party, the base is certified by an accredited body and qualified by a ministry, and the accounts are audited by an independent auditor.
The detail for your adviser (the journey of the money, the rank, the classes of shares, the tax treatment, the comparison with market notes) is in the two documents: the terms of the note (PDF, in Spanish) and the private investor's position (PDF, in Spanish). The risks of the operation and their mitigations, in the risk matrix.
Frequently asked questions
Frequently asked questions
What exactly is Volcano's convertible note?
A loan without running interest to a specific startup, which converts into a class A stake when the startup completes the round you entered. Unlike market notes, the stake is fixed on day one with a closed formula: no discount, no cap and nothing to negotiate afterwards.
When does my note convert?
When the startup completes the round you entered: each round covers whole phases and closes when the gate of its last phase is crossed. The seven rounds, with their entry and close, are on the rounds page. If the project is sold before, the sale converts and you are paid with priority.
Where does my money go?
The startup passes it on as a subordinated loan to the project vehicle, the AIE, which with that money and with the tax investors' capital pays for the R&D. On completion, the startup converts its loan into AIE capital, the AIE is dissolved and awards the startup all the project's intellectual property: that is the close of round 2.
Can I withdraw if the project does not convince me halfway through?
Not on your own assessment: the subscription is binding for the full amount from signing, and it is disbursed in tranches against technical milestones attested by an independent verifier. You are released from the remaining tranches only on objective events: milestone not attested in time, ex post certificate not obtained, lapse of the certification, insolvency or serious breach not remedied.
Can the startup pay me back instead of converting?
Yes, as long as none of the conversion events has been triggered: by returning the capital disbursed plus a simple premium of 10% per year (1.10× in the first year, 1.20× in the second, 1.30× in the third). Once conversion is triggered, the buyback option disappears and you hold your stake with no subsequent cap.
John F. Kennedy, 1962