This article is for Irish startup founders raising early-stage capital who are considering convertible loan notes instead of traditional equity investment.
If you're wondering how convertible notes actually work, what terms like valuation caps and discount rates mean, or when the debt converts to shares, this guide explains the complete structure, key terms, and conversion mechanics in practical detail.
Key Takeaways
Convertible notes defer valuation negotiations until your next funding round, letting you raise capital quickly without arguing over early-stage valuations.
The valuation cap sets the maximum conversion valuation, rewarding early investors with more shares if your company grows significantly.
Standard discount rates of 15-25% give noteholders cheaper shares than new investors, with 20% being most common in practice.
Conversion triggers automatically when you raise a qualified financing round, typically requiring €250,000+ to prevent small investments triggering unfavorable terms.
Interest accrues at 3-8% annually and converts to additional shares rather than requiring cash payments during the loan period.
Laura Ryan is a practising Barrister at the Bar of Ireland. She graduated from the Honourable Society of King’s Inns in 2024, having previously qualified and practised as a Chartered Accountant in a big four accounting firm.
A convertible loan note is a short-term loan that automatically transforms into equity shares during your next funding round. It starts as debt but both you and the investor expect it to eventually become equity, allowing you to raise capital quickly without agreeing on your company's valuation today.
How is a convertible note different from a regular equity investment?
Traditional equity investment requires agreeing on your company's valuation immediately, whereas convertible notes defer this valuation question until your next funding round. The noteholder receives shares at a discount to whatever price the next investors pay, making fundraising faster and rewarding early investors for taking on more risk.
What happens to the interest on a convertible note?
Interest accrues at typically 3-8% annually but rarely gets paid in cash. Instead, the accrued interest converts to additional shares when the note converts to equity, increasing the investor's total share count at conversion.
What is a valuation cap and why does it matter?
A valuation cap sets a maximum company valuation for conversion purposes, meaning even if your priced round values the company higher, noteholders convert at the cap. For example, with a €5 million cap and a €10 million next round valuation, the investor effectively gets twice as many shares as new investors for the same money, rewarding them for investing earlier when risk was higher.
How does the discount rate work on convertible notes?
The discount rate gives noteholders a percentage reduction (typically 15-25%, with 20% being most common) on the next round's share price. If both a cap and discount exist, investors use whichever provides more shares—the discount rewards early investors when company growth is moderate, while the cap rewards them when growth is exceptional.
When does a convertible note actually convert to shares?
Conversion typically happens automatically when you close a "qualified financing" round—usually raising €250,000 or more in equity. This threshold prevents small investments from triggering conversion at unfavorable terms and ensures conversion happens during a meaningful equity round with proper valuation.
What happens if I don't raise a priced round before the maturity date?
At maturity (typically 12-24 months from investment), three things might happen: you must repay the principal plus accrued interest in cash, parties agree to extend the maturity date, or the note converts at a predetermined valuation if specified in the agreement. Most investors expect you'll raise a priced round before maturity, and if you haven't, it signals potential problems with the business.
Can small investments trigger the conversion of my convertible notes?
No, most notes require the new round to exceed a minimum threshold—commonly €250,000—to trigger conversion. A €50,000 friends and family round wouldn't trigger conversion, but a €500,000 seed round or €2 million Series A would automatically convert the notes.
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