In the age of technology, the startups has attracted many people in recent decades. This is mainly due to the rapid rise of the digital economy, which has led to many success stories of companies that today represent giant players in the market, regardless of the sector in which they operate. In this context of scalable entrepreneurial initiatives, the startups have proved to be a huge attraction for investors around the world. 

In Brazil, this technological and entrepreneurial advance has merited the attention of the legislature, which has developed specific regulations to deal with this so-called ecosystem. startups, such as Complementary Law No. 155 of 2016 (the Angel Investment Law) and, even more relevantly, the Legal Framework for the Startups (Complementary Law no. 182). 

The startups, most of them start their operations with scarce or non-existent resources. At this point, there is a need to raise finance from external capital, whether from individual investors, private equity Crowdfunding [1], Venture Capital or Private Equity [2]. Among these modalities, one that has been common and has attracted a lot of attention is that of the angel investor, an investor who, in principle, will not be part of the company, but who believes in the potential of the business idea and so provides the capital for the company to start its activities [3]. It is from this initial point that the parties need to seek appropriate formatting and formalization of the relationship in order to protect both. 

In order to make this investment viable, there are some legal instruments specifically designed to mitigate the risks arising from these operations, such as, for example, the share option contract, the participation contract brought in by Complementary Law 155/2016, the creation of a Holding Company (SCP) and the loan agreement convertible into a shareholding, which have gained prominence in this type of investment in recent years. 

Unlike the loan agreement provided for in articles 586 and 587 of the Civil Code, which involves the obligation to return a fungible thing of the same kind, quality and quantity, the convertible loan agreement gives the investor the option of converting the credit granted to the startup into a stake in the company's capital [4]. This type of contract originates from 'convertible notes' which represent in that business practice an efficient and fast way of injecting capital in startups. 

In Brazil, the convertible loan is an instrument that includes specific clauses aimed at preventing risks that end up, in a way, delaying the process of the investor joining the company. 

As a result of this adaptation of the convertible loan, with various forecasts and alternatives, including the impossibility of a return on the investment or of joining the company as a result of the possible failure of the startupHowever, the issue is still the subject of debate and diverse opinions in doctrine and case law. In recent years, it has been possible to see that some courts have recognized the operation as a normal mutual and not as a risky investment, establishing that the startup must return the money to the investor [5] [6]. 

With this in mind, it is essential to include clauses that mitigate the risk of the case being taken to court, such as the provision for debt forgiveness, also known as debt relief. 'write-off', which represents a contractual provision that allows the creditor to forgive part or all of the amount borrowed if certain specific conditions are met. This debt forgiveness clause can be used both to encourage the debtor company to meet targets or milestones - for example, to achieve certain levels of revenue, profits or other performance metrics - and to protect the startup if the business doesn't work out and you have to close down. 

Thus, the convertible loan agreement is currently the most widely used legal instrument for making investments in startups in the early stages of its trajectory. As a result, both the investor and the startup, in this case, having specialized legal advice that understands the risks involved is essential. Qualified advice can ensure that all the clauses of the convertible loan agreement are drafted in a clear and equitable manner, protecting the interests of both parties, anticipating and mitigating possible future problems, ensuring that the startup can focus on its growth and development, while the investor has the security that his investment is protected by a well-structured agreement. 

[1] FEIGELSON, Bruno; NYBO, Erik Fontenele e FONSECA, Victor Cabral. Direito das startups. 1. ed. Saraiva: São Paulo, 2018.
[2] RAMALHO, C.; FURTADO, C. V.; LARA, R. A indústria de private equity e venture capital: 2º censo brasileiro. 2011. Available here.
[3] COELHO, G.T.; GARRIDO, L. G. Dissecando o contrato entre startups e investidores anjo. In: JÚDICE, Lucas Pimenta. NYBØ, Eirk Fontenele (Org.) Direito das Startups. São Paulo: Juruá, 2016.
[4] ZIRPOLI, Rodrigo Domingos. Contrato de mútuo conversível em participação societária. São Paulo: Quartier Latin, 2023.
[5] (TJSP; Apelação Cível 1094985- 22 37.2020.8.26.0100; Relator (a): Sérgio Shimura; Órgão Julgador: 2ª Câmara Reservada de Direito Empresarial; Foro Central Cível - 19ª Vara Cível; Data do Julgamento: 08/11/2022; Data de Registro: 09/11/2022)
[6] (TJSP; Apelação Cível 1012467-48.2018.8.26.0071; Relator (a): Sérgio Shimura; Órgão Julgador: 2ª Câmara Reservada de Direito Empresarial; Foro de Bauru - 5ª Vara Cível; Data do Julgamento: 24/08/2021; Data de Registro: 25/08/2021)

By: Maria Luisa Carvalho Teixeira
Corporate Law | CPDMA Team