IDDA: Convertible Debt Mechanism to Be Introduced for Startups
Convertible financing instruments are among the key tools used to fund startups. One of the main challenges faced by startups is determining a company's fair value during its early stages of development.
According to Startup.az, this was stated by Farid Osmanov during a meeting of the Parliament’s Economic Policy, Industry and Entrepreneurship Committee.
Osmanov noted that this issue creates significant difficulties for startups. As a result, investors and entrepreneurs often prefer to use more flexible financing instruments instead of attempting to determine a company's valuation at an early stage.
He explained that the primary mechanism proposed in this context is a convertible debt agreement. Under this model, an investor provides a loan to a company, but when a future investment round takes place or certain conditions specified in the agreement are met, the debt is not repaid in cash. Instead, it is converted into an equity stake in the company.
According to Osmanov, this approach helps compensate for the risks undertaken by early-stage investors. To support this objective, the draft legislation includes internationally recognized mechanisms such as valuation caps and discount rates, ensuring that the framework aligns with global best practices.