Convertible Instruments: Questions a Founder Should Ask

A convertible instrument can give a UAE startup cash before the founders and investor agree on the price of a future equity round. The agreement still makes decisions today. It may say when the investment converts, how the conversion price is determined, which shares are issued and what happens if the next round never closes. Read those provisions together before including the cash in a financing plan.

Imagine a Dubai startup that needs six months to finish a paid pilot. An investor offers AED 500,000 through an instrument that converts at the next qualifying equity round. The founders can see how the money would pay for delivery. They also need to know whether the expected round would qualify, whether interest or other amounts are included in conversion and what happens if the pilot takes longer. Those questions matter even if both sides agree on the headline amount.

Find out what the company is signing now

Ask for the complete document and any side letters. Identify the issuing company, the amount and currency, the conditions for receiving cash and the obligations that begin on signing or funding. The company that operates the business may differ from the company expected to issue shares. Have advisers confirm the parties, authority and applicable law before assuming the instrument fits the structure. Keep the draft beside the cap table and cash forecast so each team is working from the same terms.

Start with the character of the instrument. A convertible loan may have interest, a maturity date and provisions for repayment or conversion. A future-equity agreement may set a different set of rights and events. Ask which obligations exist in this particular draft. The word “note” in a programme description does not by itself establish a repayment obligation, and a title containing “equity” does not tell you when shares will be issued.

Hub71's official FAQs describe its Abu Dhabi programme cash incentive through a SAFE, or Simple Agreement for Future Equity, alongside separate in-kind support. The FAQ describes an uncapped instrument with no discount and a forward-looking most-favoured-nation provision. Those are published descriptions of one programme's terms. Request the actual instrument and verify what the provision covers, how it is exercised and whether any conditions apply before using it in a model. Hub71 programme FAQs

Identify the events that change the investor's rights

Read the definition of a qualifying financing and any minimum amount it requires. Check which funds count toward the threshold. A new equity subscription and cash already advanced under a convertible instrument may be treated differently by the agreement. Ask whether closings on different dates are combined and what happens if the company raises less than expected. A founder can have enough money to extend runway while still failing to trigger automatic conversion.

Check who can elect conversion outside that event. A smaller raise might require an investor decision or amendment, depending on the agreement. A sale before the next round may have its own treatment. Ask what the investor can receive in that case, which other obligations are paid first and whether the company needs an approval or notice before proceeding. Get advice on the actual text and priority rather than assuming the provisions work alike for a sale and an equity round.

Record the trigger and the evidence that confirms it. If it is a closing, ask who confirms the amount and date and which document supplies the new share price. If the event depends on a notice or election, record who sends it and when. An agreed price calculation is of little use if the parties disagree over whether the event happened. Build a dated checklist the founders can hand to whoever manages the next round.

Calculate conversion price, balance and share count separately

A discount can change the price used to issue shares to the convertible investor. A valuation cap can use a different formula and a defined measure of capitalization. Ask how those provisions interact when both appear. Some documents specify which price applies under which conditions. Also check whether the calculation includes an option pool, other convertibles or changes made as part of the new round. The headline cap does not supply a complete denominator.

Take a simplified, hypothetical agreement for AED 500,000 with a 20% discount to the next round share price. Assume a qualifying round prices new shares at AED 10 and the agreement applies the discount to that price. The conversion price is AED 8, and AED 500,000 converts into 62,500 shares before any other adjustment. If a separately defined cap produced an applicable price of AED 6.25 and the hypothetical contract specified the lower price, the same amount would convert into 80,000 shares. These are independent price scenarios within a made-up agreement. They are not Hub71 terms or terms of a UAE deal.

Now suppose the instrument is instead a loan that adds simple interest at an illustrative 8% a year and expressly converts accrued interest with principal. After a full year, AED 500,000 becomes AED 540,000 for that conversion calculation. At AED 8 a share, the number rises to 67,500. The model uses a full year for simplicity. A real agreement can specify different dates, day counting, charges, rounding or a different treatment of interest. Confirm which balance actually converts before working out percentages.

Finish the ownership view after modelling the other issues. If the startup began with 800,000 shares and the round issues another 200,000 to cash investors, 62,500 conversion shares would represent about 5.88% of the 1,062,500 shares outstanding under these assumptions. Add any further conversion, option exercise or pool adjustment on the correct basis. Model each instrument as a separate line. Two investors who supplied equal cash can receive different numbers of shares if their terms differ.

Run a cash scenario in which the next round does not happen

A startup may take the investment because it expects a later round to close before maturity. Build a second forecast where it does not. If the agreement is a loan, read the payment dates and circumstances in which a holder can demand or defer repayment. Check whether interest is paid periodically, added to principal or handled in another way. Include the terms for default, amendments and any security or guarantees. Counsel should review which rights apply and who bears the exposure.

Use the cash schedule to see when a decision has to be made. If the loan is due in six months and the latest forecast has the company reaching its operating cash floor in month five, work backwards from both dates. Estimate what could change through collections, spending changes or an agreed amendment. An expected extension is separate from an approved extension. Keep it out of the committed case until the relevant parties agree and the company has the evidence it needs.

For a future-equity agreement, ask what happens if a financing never triggers conversion and the founders receive an offer to sell the business. Read the provisions on sale, dissolution and priority and check how they interact with the company's other commitments. In either form, test a scenario in which investors disagree about an amendment or one holder has rights another holder lacks. The terms should give the company a way to identify who must decide and by when.

Check side rights and the steps to issue shares

Ask what the investor may receive or request after signing. A most-favoured-nation provision can depend on future agreements and on the scope and process set out in its text. A participation right can affect allocation in a later financing. Information rights can add reporting work before any shares are issued. Record these provisions and identify the events that make them relevant. Review the effect of offering different terms to another investor before the company promises them.

The company's lawyers or corporate advisers should also map authority, approvals and records at signing and conversion. ADGM's Registration Authority lists allotment of shares among events covered by its filing guidance. Use the rules for the issuing entity and verify what actions are required at each stage. An illustrative conversion calculation is only one input. The team still needs the approvals, records and notices the transaction calls for. ADGM event-driven filing guidance

A Dubai Chamber of Digital Economy reel shows a startup and investor event. An initial conversation can establish the investor's preferred instrument and what it needs to evaluate the company. Use it to ask which clauses are fixed and who reviews the rest. Track verbal indications separately from draft terms, signed commitments and cash received. The reel gives local context for the meeting rather than evidence of the terms any investor offers.

Before the next financing, give the incoming investor a schedule of all outstanding instruments and any rights that can change when a new agreement is offered. Check whether a proposed term triggers a notice or election under an earlier document. A change that looks modest in one negotiation can affect several holders. Have the parties reconcile the schedule before pricing, then retain the confirmed version alongside the signed documents. After conversion, show which instruments ended, which remain outstanding and which rights continue. That record becomes the starting point for the next cap table and cash forecast.

Put the unanswered questions next to the decision

Prepare one dated sheet for the company and its advisers. Include cash expected, any repayment dates, triggering events, share price formulas, scenarios and open decisions. Attach the source clause for each input. Ask a colleague to reproduce the share count and a finance owner to trace the cash through the downside case. A disagreement over the definition of capitalization or whether interest converts should appear as an open item before the documents are signed.

For the Dubai startup, the decision can turn on whether the cash covers the pilot under a realistic timetable and whether the company can handle the terms if the next round is smaller or later. Resolve the clauses that determine those outcomes first. When the team can explain what happens at funding, conversion, maturity or sale using the same records, it can compare the proposal on the work it enables and the commitments it creates.