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.
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.
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.
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.
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.
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.
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.
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