This article is for Irish startup founders raising their first seed funding and investors considering early-stage convertible note deals.
If you're wondering what a convertible loan note actually is, how the conversion mechanics work, or whether you should use one instead of a priced equity round, this guide covers the complete structure, conversion mechanisms (caps and discounts), and when convertible notes make sense versus traditional equity deals.
Key Takeaways
• Convertible notes defer valuation discussions until you have revenue or product-market fit, avoiding premature dilution or unrealistic expectations.
• Note holders convert at either the valuation cap or discount rate, whichever gives them more shares when your Series A closes.
• Typical convertible notes include 18-24 month maturity, 2-8% annual interest, 15-25% discount, and €2-10 million valuation caps in Ireland.
• Use convertible notes for raises under €250,000 to close funding in 1-2 weeks with €1,000-€3,000 legal costs versus €5,000-€15,000 for equity.
• Avoid stacking multiple convertible notes as this creates cap table complexity that frustrates Series A investors during conversion.
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 debt instrument that automatically converts into equity shares when specific trigger events occur, such as your next significant funding round. Think of it as a loan that transforms into ownership rather than requiring cash repayment, combining features of both debt and equity financing.
How much faster can I close a convertible note compared to an equity round?
Convertible notes typically close in 1-2 weeks compared to 4-8 weeks for equity deals. Legal fees are also significantly lower at €1,000-€3,000 versus €5,000-€15,000 for equity rounds, with fewer terms to negotiate overall.
What's the difference between a valuation cap and a discount rate?
A valuation cap sets the maximum company valuation used for conversion calculations (e.g., if your Series A values the company at €10 million but your note has a €4 million cap, note holders convert at €4 million). A discount rate gives note holders a percentage reduction on the share price paid by new investors (e.g., 20% discount means they pay €0.80 per share when Series A investors pay €1.00). Investors always receive whichever mechanism is more favorable to them.
Do I have to pay monthly interest on a convertible note like a regular loan?
No, convertible note interest doesn't require monthly payments. Instead, interest accrues and adds to the principal amount that eventually converts to equity—so if you raise €100,000 at 5% interest for 18 months, the converting amount becomes approximately €107,500 worth of shares.
What happens if my convertible note reaches its maturity date before I raise a qualifying round?
If maturity arrives without a qualifying financing, the most common outcome is extension by mutual agreement since forcing repayment could bankrupt the company. Other possibilities include automatic conversion at a pre-determined valuation or repayment of principal plus interest (rare), though in practice most notes convert well before maturity.
How much do I need to raise to trigger conversion of my convertible notes?
The most common trigger is raising a specified minimum amount in a priced equity round, typically ranging from €250,000 to €1 million depending on company stage and investor sophistication. Enterprise Ireland's PSSF program uses a €250,000 qualifying round threshold, which has become somewhat standard in Ireland.
When should I use a convertible note instead of doing a priced equity round?
Consider convertible notes when you're raising from friends-and-family, your company is too early to support a meaningful valuation discussion, you need quick capital to hit a milestone, or you're raising smaller amounts under €250,000 where legal efficiency matters. Skip convertible notes and do a priced equity round when you have revenue to support a meaningful valuation, lead investors demand equity, the round size exceeds €500,000, or you need to establish board governance.
What happens to my convertible notes if my company gets acquired before a qualified financing round?
If your startup gets acquired before a qualified financing occurs, notes typically convert based on the acquisition price less any liquidation preferences divided by fully-diluted shares outstanding. Some notes include "2x return" provisions in acquisition scenarios, guaranteeing note holders receive at least double their investment to protect early investors if you sell at a modest valuation.
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