Convertible investment instrument – Opportunities and risks for investors

In the context of the need for rapid, flexible capital mobilization that aligns with the growth of innovative startups, Vietnamese law has gradually improved the legal framework for new forms of investment. The Law on Support for Small and Medium Enterprises 2017 and Decree No. 38/2018/NĐ-CP laid the foundation for investment in innovative startups. Notably, Decree No. 210/2025/NĐ-CP amended and supplemented several provisions of Decree No. 38/2018/NĐ-CP, clarifying the mechanism of convertible investment instruments. Accordingly, investors can inject capital into enterprises in the form of financial instruments, which may later be converted into equity or shares once agreed conditions are met. This represents an important step toward creating a transparent, safe, and market-oriented mechanism. The following article by TNTP Lawyers analyzes in detail the opportunities and risks for investors when using convertible investment instruments under the new regulations

1.What is convertible investment instrument?

According to Clause 5, Article 2 of Decree No. 38/2018/NĐ-CP, as amended and supplemented by Decree No. 210/2025/NĐ-CP, a convertible investment instrument is a form of investment whereby investors provide capital to innovative startups through financial instruments, and such investment may be converted into equity or shares of the enterprise once the agreed conditions between the parties are satisfied.

2.Characteristics under Vietnamese Law

 Investor entity: Innovative startup investment funds.

• Invest Target: Small and medium innovative startups identified and managed under Small and Medium Enterprises (SME) support policies. The total investment cap of a fund in one enterprise must comply with Decree No. 38/2018/NĐ-CP (e.g., not exceeding 50% of charter capital after investment, as stipulated in Clause 2, Article 18 of the Law on Support for SME 2017).
• Nature of the instrument: A financial instrument with conversion clauses, meaning the initial capital (which may take the form of debt or purchase right) is agreed to be converted into equity/shares under certain conditions (often linked to subsequent fundraising rounds, time milestones, or operational conditions/financial performance).
• Conversion conditions: Determined by mutual agreement and recorded in the investment contract (time, conversion rate, valuation method, discount). The law allows valuation to be deferred at the time of the initial investment and tied to future events, provided compliance with relevant regulations (enterprise, investment, tax).
• Legal consequences upon conversion: Once conditions are met, the investment is recognized as equity/shares. The enterprise must update its member/shareholder register, charter, and business registration documents in accordance with specialized laws. Ownership recognition must comply with limits and procedures under Decree No. 38/2018/NĐ-CP and the Enterprise Law

3.Common types of convertible investment instruments

• Convertible loans: Suitable when enterprises in urgent of capital but cannot be valued yet. Investors may choose to convert loans into equity during subsequent fundraising rounds or upon meeting certain conditions.
• Convertible bonds: Typically applied to medium and large enterprises. Investors earn interest from bonds while retaining the option to convert into shares.
• SAFE/ASA (Simple Agreement for Future Equity/Advance Subscription Agreement): Suitable for very early-stage startups where valuation is nearly impossible. However, the legal framework for this type in Vietnam remains incomplete and entails significant risks.

4.Benefits for investors

• Acquire shares at preferential prices: Discount clauses or valuation caps allow investors to convert at lower prices compared to later investors, optimizing returns when the enterprise grows strongly.
• Reduced risk of capital loss in early stages: Investor now act as creditors, retaining the right to demand repayment if conversion conditions are not met, thus mitigating risks compared to immediate equity investment.
• No need for immediate valuation: Deferring valuation until later fundraising rounds gives investors more time to observe enterprise performance before deciding on conversion.
• Potential to negotiate additional control rights: Investors may request rights to receive management reports, oversight rights, or preemptive rights in new fundraising rounds, thereby better protecting their investment.

Overall, convertible instruments offer investors flexibility, access to equity at better prices, and reduced risk of total loss. They are particularly suitable when enterprises cannot yet be valued or need rapid capital mobilization.

5.Risks for investors

• Unfavorable conversion if growth is slow: If the enterprise fails to meet expected growth, conversion into shares becomes unattractive and investment value declines.
• Dilution risk without proper valuation caps: Strong growth without appropriate caps of the invested enterprise may leave early investors with much lower ownership than anticipated.
• Disputes over conversion terms: Common issues include timing, valuation methods, and post-conversion ownership rate. Ambiguous contracts pose high risks of disputes.
• Legal risks from the enterprise: Enterprises may fail to update charters, shareholder registers, or capital contribution records. Under the Enterprise Law 2020, equity/share recognition requires strict procedures. If legal conditions are unmet, business registration authorities may reject conversion.

The greatest risk for investors often arises from unclear conversion agreements or enterprises failing to complete legal procedures. In such cases, investors may lose time, incur costs, and even fail to be recognized as shareholders despite having invested capital.

Convertible investment instruments present significant opportunities for investors by combining the advantages of loans and equity ownership, while enabling enterprises to raise capital quickly without immediate valuation. However, these benefits come with notable risks, especially regarding conversion terms, dilution, and legal compliance during capital recognition. To mitigate risks, investors should thoroughly assess enterprises, carefully review contracts, and ensure all legal procedures are properly executed.

This article, “Convertible investment instrument – opportunities and risks for investors”, was prepared by TNTP Lawyers. We hope it proves useful to our readers.