< Glossary
 /  
Fundraising

Convertible Loan Note

/kənˈvɜːtəbəl ləʊn nəʊt/

A convertible loan note is a debt instrument that can be converted into equity shares at a future date, typically during a subsequent funding round.

Get Your
Irish Company
Today

From €99 including government fees.

5-day setup
Government fees included
Legal documents included
Free automated compliance tracking
Free legal data room
Ongoing legal support
Pricing
Share:
A linkedin icon
An icon of X (formerly Twitter)

How does a convertible loan note work?

The convertible loan note functions as temporary debt that automatically converts to equity during your next funding round.

Investors lend money now and receive shares later at a predetermined discount or valuation cap.

This conversion typically happens when you raise a qualifying investment round.

Why do investors use convertible loan notes?

Investors favour convertible loan notes because they avoid complex valuation negotiations during early stages.

The instrument provides downside protection through debt features whilst offering upside potential through equity conversion.

It's faster and cheaper than traditional equity rounds.

When does a convertible loan note convert to equity?

Convertible loan notes typically convert during qualifying funding rounds, usually when you raise a minimum amount from investors.

Conversion can also trigger upon specific events like acquisition, IPO, or maturity date.

The exact triggers depend on your note's specific terms.

Where would I first see a
Convertible Loan Note?

You'll likely first encounter a convertible loan note when seeking early-stage funding, as investors often use this flexible financing instrument before your company has established a clear valuation.

What are the key terms in a convertible loan note?

Essential convertible loan note terms include the discount rate, valuation cap, interest rate, and maturity date.

The discount gives investors shares at below market price, whilst the cap sets maximum conversion valuation.

Interest typically compounds until conversion occurs.

How is a convertible loan note different from equity?

Unlike equity investment, a convertible loan note initially creates a creditor relationship rather than ownership.

Investors don't receive voting rights or board seats until conversion.

If conversion never occurs, the instrument remains debt with repayment obligations.

What happens if a convertible loan note doesn't convert?

If your convertible loan note reaches maturity without converting, it typically requires repayment as debt.

Some notes include provisions for automatic conversion or extension.

Others may convert to equity at a predetermined valuation regardless of funding status.

People Also Asked: