Convertible notes and BSA-AIR: benefits, risks and a practical guide for French startups

Convertible notes and BSA-AIR: advantages and disadvantages

In France, convertible bonds (often called convertible notes) and BSA-AIR have become standard tools for financing a startup quickly without setting an immediate valuation. This guide compares their strengths and limitations, details the clauses to negotiate and offers numerical examples within the French legal framework (SAS/SA).

1) Essential legal reminders

Convertible bonds (OCA/OCEANE)

Convertible bonds are hybrid securities initially conferring a claim (debt) that may convert into shares on defined events (next funding round, maturity, change of control, etc.). They are governed by Code de commerce provisions on securities giving access to capital (particularly art. L.228-91 et seq., Legifrance). Issuance involves shareholder resolutions (or delegated authority) and, where applicable, waiver of preferential subscription rights.

BSA-AIR

BSA-AIR combines the issue of Bons de Souscription d’Actions (BSA, themselves governed by the rules on securities giving access to capital) with a rapid investment agreement (AIR) setting deferred conversion terms (discount, cap/floor, trigger events, long-stop date). There is no specific legislation for “BSA-AIR” as such; it is a form of contractual structuring based on the general BSA regime (Code de commerce, art. L.228-91 et seq., Legifrance). For a practical overview, see SeedLegals and Legalstart.

In practice, only suitable corporate vehicles (SAS/SA) have the flexibility to issue these instruments. For formalities and frameworks, also see Service Public Pro and industry guidance from France Invest.

2) Comparing advantages

Shared benefits (startup and investors)

• Rapid access to funds without setting an immediate valuation.
• Conversion at the next funding round, with protective mechanisms (discount, cap/floor) rewarding the investor’s early-stage risk (SeedLegals).
• Less documentation friction than an ordinary-share round (streamlined process).

Features of convertible bonds

• Creditor status until conversion (repayment priority over shareholders while unconverted).
• Possibility of interest, maturity and early repayment clauses.
• Flexibility for events of default and financial covenants (Legifrance; Bpifrance good practice BPI France).

Features of BSA-AIR

• Often a faster process (little or no interest, no cash repayment right by default).
• Standardized mechanisms (20–25% discount, valuation cap, 18–24-month long-stop date) (Legalstart ; SeedLegals ; Le Blog du Dirigeant).
• Cash savings (no interest or repayment schedule).

3) Disadvantages and risks

• Valuation uncertainty until the conversion event: risk of greater-than-expected dilution.
• Imprecise clauses (no long-stop date, vague conversion formulas) = high risk of disputes and reclassification. For offering compliance and investor protection, see the AMF.
• Legal constraints (SAS/SA, shareholder resolutions, waiver of preferential subscription rights) and investor information (prospectus and exemptions under the EU Prospectus Regulation); refer to the AMF framework and Regulation (EU) 2017/1129 (AMF ; EUR-Lex).
• Accounting and tax treatment to be secured case by case (e.g. convertible bonds = debt until conversion; BSA-AIR = instrument giving access to capital) with support from a statutory auditor and Bpifrance (BPI France).

4) Structuring a convertible note (OCA) in France

• Amount, rate (fixed or PIK), maturity (usually 12–24 months), interest optionally capitalized.
• Conversion events: next qualified round (specify threshold), maturity, change of control, IPO.
• Conversion price: discount to the round’s share price (e.g. 10–25%) and/or valuation cap (pre-money cap).
• Early repayment and possible non-conversion premium.
• Covenants, events of default, periodic information.
• Corporate: authorizations/delegations, waiver of preferential subscription rights if needed, subscription form, updates to articles and register (see Service Public Pro; legal framework on Legifrance).
• Public offering: check prospectus exemptions (AMF; Prospectus Regulation, AMF ; EUR-Lex).

5) Structuring a robust BSA-AIR

• Discount (often 20–25%) and cap (valuation ceiling); optional floor if the future valuation is low.
• Trigger events: qualified round, maturity (18–24-month long-stop date), change of control.
• Clear conversion formula (see below) and a numerical example in the AIR.
• Anti-dilution provisions customary in practice (adjustments for dilutive transactions before conversion).
• Governance: information rights; voting/governance rights arise on conversion (to coordinate with the shareholders’ agreement).
• Corporate: issue of BSA (SAS/SA), waiver of preferential subscription rights, subscription form, BSA register; Code de commerce compliance (see Legifrance). Industry good practice: France Invest, BPI France.

For mechanics and market practice: SeedLegals, Legalstart and Le Blog du Dirigeant.

6) Conversion formulas and examples

BSA-AIR (discount + cap)

Number of shares at the qualified event, in practice:
N = Amount invested / min(Round share price × (1 − discount), Share price derived from the cap).
Where Price (cap) = Pre-money valuation cap / pre-round number of shares (fully diluted).

Example: €300k investment, 20% discount, €6m pre-money cap. Next round at €8m pre-money, 1,000,000 FD shares pre-round, so round price = €8.00; discounted price = €6.40; cap price = €6.00. Use €6.00. N = 300,000 / 6.00 = 50,000 shares.

Convertible bond (discount + interest)

Example: €300k OCA, 6% simple interest, 18-month maturity, conversion at a round price of €8.00 with a 15% discount (€6.80). Interest = €27k. N = (300,000 + 27,000) / 6.80 ≈ 48,088 shares. Until conversion, the bond remains debt with priority over shareholders.

7) When should you choose one or the other?

• Priority on cash flow and simplicity (no interest, fast process): BSA-AIR.
• Enhanced investor protection (debt, interest, default clauses): OCA.
• Market and timing: if an institutional round is close and structured, either may be suitable; refer to your guide to understanding and negotiating a term sheet.
• Dilution: model cap/discount scenarios and apply our ways to limit founder dilution.

8) Effects on governance and the shareholders’ agreement

Plan conversion: voting/governance rights, liquidation preference, non-dilution, information. Align the AIR/convertible note with your shareholders’ agreement (see the key shareholders’ agreement clauses) and the liquidation preference rule.

9) Operational checklist and timetable

• Check the legal form (SAS/SA), delegated authorities, waiver of preferential subscription rights and corporate resolutions (see Service Public Pro).
• Document: AIR/convertible note, FD cap table, conversion formula, long-stop date (often 18–24 months), trigger events, discount and cap/floor, anti-dilution, information.
• Offering compliance: prospectus exemptions and investor information (see AMF and EUR-Lex).
• Accounts and tax: classification (debt vs equity instruments), tax effects, statutory auditor (BPI France).
• Typical timetable: 1–2 weeks for scoping/terms, 1–2 weeks for documentation and corporate resolutions, 1 week for closing/registrations. For the complete funding process, see the legal steps in a seed funding round and plan your legal budget by stage.

Quick FAQ

Is BSA-AIR legal in France?

Yes, it is a contractual BSA structure governed by the Code de commerce (securities giving access to capital). There is no specific “BSA-AIR” legislation, but the structure is accepted in practice (SAS/SA).

Is a long-stop date needed?

Strongly recommended (often 18–24 months) to avoid indefinite uncertainty and define what happens if no funding round occurs (automatic conversion, fallback valuation, etc.).

Is an AMF prospectus mandatory?

No, if you qualify for an exemption under the Prospectus Regulation (EU) 2017/1129. Check case by case with the AMF/advisers.

Who can issue these instruments?

In practice, SAS/SA. SARLs do not have a securities-giving-access-to-capital regime suited to these instruments.

Useful resources: Legifrance (Code de commerce), AMF, EUR-Lex, BPI France, Service Public Pro, France Invest.