Convertible Loan Note

A Convertible Loan Note, often shortened to CLN, is a written agreement where an investor lends money to a company. The agreement allows that debt to become shares later if a stated event happens.

Convertible means that something can change into something else. Here, money owed as a loan may change into shares in the company.

A loan note is a formal document recording money owed by a company and the rules for repayment, interest and possible conversion.

In finance, a note is a formal written promise about money. It is not the same as an informal handwritten reminder.

It begins as a loan because the company owes money to the investor. It may later stop being a loan if it converts into shares.

Yes. The investor is putting money at risk in the hope of receiving repayment, interest, shares or another agreed benefit.

No. Buying shares usually makes the investor a shareholder immediately. A CLN investor normally starts as a lender.

No. A bank loan is usually designed to be repaid in cash. A CLN may instead convert into ownership shares.

They can help a company raise money before a full company valuation and share price have been agreed.

Young companies often need money quickly but may not yet have enough information to agree a fair valuation.

Yes. Convertible debt can be used by larger companies too, although the structure may be more complex.

No. Each agreement can have different interest, conversion, repayment, security, maturity and voting terms.

The investor provides the money. The investor may be an individual, a company, a fund or another organisation.

The company named in the agreement receives the money and becomes responsible for following the terms.

Usually an authorised person signs for the company and the investor also signs. The exact signing rules depend on the document.

A child usually cannot enter complex investment contracts alone. A parent, guardian, trust or specialist arrangement may be required.

Yes, founders may sometimes lend money to their own company through a properly documented arrangement.

Possibly, but the company should consider employment, securities, tax and financial promotion rules.

Yes. A company may issue notes to several investors, either under one instrument or separate agreements.

Not always. Different investors may negotiate different rights, although this can create practical and fairness issues.

A solicitor commonly drafts or reviews it. Templates exist, but using one without proper advice can create serious problems.

Sometimes. Approval may be required under the articles of association, a shareholders' agreement, previous investment documents or company law.

The principal is the original amount lent to the company.

Interest is an additional amount that may build up while the debt remains outstanding.

No. Some notes have interest and others do not.

It may be calculated as a percentage of the principal for each year or another period stated in the agreement.

It may be paid in cash, added to the debt or converted into shares. The agreement should say which applies.

Yes. Some CLNs allow accrued interest to convert alongside the principal.

Only if the agreement allows early repayment or the investor agrees to it.

Usually only when the agreement gives that right, such as after a default or another specified event.

The parties can agree a currency such as pounds, euros or dollars, but currency risk and payment rules should be considered.

The real value of repayment or conversion may rise or fall when the investor and company use different currencies.

The agreement may allow general business use or restrict the money to specific purposes.

The debt still exists unless it converts, is repaid, written off or otherwise dealt with under the agreement.

Conversion is the process of changing the debt into shares.

It can happen when a stated event occurs, such as a funding round, sale, maturity date or investor decision.

It is an event written into the agreement that activates the conversion rules.

It is a future share investment round that meets conditions such as a minimum amount raised.

The minimum conditions prevent a very small or artificial funding round from automatically triggering conversion.

Sometimes. Other notes require the investor or company to choose. The document should make this clear.

Yes, if the agreement allows partial conversion.

That depends on whether conversion is automatic or optional under the agreement.

Only if the agreement gives the company that right and the required conditions are met.

The converted amount normally stops being owed as debt because it has been exchanged for shares.

The investor may receive a share certificate or electronic ownership record, depending on how the company records shares.

Companies House records certain company information, but the company's own register of members is the key legal record of shareholders.

A valuation is an estimate or agreed figure for what the whole company is worth for a particular transaction.

It helps determine the price per share and how much ownership the investor receives.

A valuation cap is a maximum valuation used in the conversion calculation.

No. It is a contractual calculation tool, not proof of market value.

It can protect an early investor from receiving too few shares if the company's later valuation becomes very high.

Yes. Some notes use only a discount or another pricing method.

It is the agreed value of the company immediately before new investment is added.

It is generally the company value after including the new investment, although definitions can vary by document.

It is the price per share used when the debt changes into shares.

The calculation usually follows a formula in the agreement and may be checked by the company, lawyers, accountants and investors.

Yes. Clear definitions, worked examples and dispute procedures can reduce this risk.

The document normally states which calculation gives the investor the better price or how the two interact.

It is a reduction from the share price paid by new investors in a later round.

The discount can reward the investor for taking risk earlier.

If new investors pay £1 per share, a simple 20 percent discount could give the note investor a conversion price of 80 pence per share.

No. Some use a valuation cap, a fixed price or another formula.

Yes, if the agreement creates different discounts for different dates or events.

Yes. A very large discount may cause significant dilution for founders and existing shareholders.

No. It normally changes the share price used for conversion.

Yes, if both are included in the agreement.

No. The company may fail or the shares may become worth less than the conversion price.

Yes, but the agreement must still explain how the conversion price will be calculated.

The agreement may provide ordinary shares, preference shares or the same class issued in a future funding round.

Ordinary shares are a common form of company ownership, often carrying voting and economic rights.

Preference shares may have special rights, such as priority for certain payments.

Only if the shares issued on conversion carry voting rights.

The investor may receive dividends after conversion if the company declares them and the share class is entitled to them.

Possibly, but private company shares are often difficult to sell and transfers may be restricted.

A share class is a group of shares carrying a particular set of rights.

Usually the agreement determines the class or links it to a future funding round.

Yes. If the company fails or performs badly, the shares may have little or no value.

No. Conversion creates ownership, not a guaranteed return.

Dilution happens when new shares reduce an existing shareholder's percentage ownership.

Usually yes, because new shares are issued to the note investor.

It is the date when the note reaches the end of its agreed term.

The note may convert, become repayable, continue by agreement or follow another outcome stated in the document.

Yes, if the required parties agree and any necessary approvals are obtained.

There is no single standard period. It may last months or several years.

Yes. A qualifying funding round or another event may trigger earlier conversion.

The maturity provisions decide whether the debt converts, is repaid or is renegotiated.

Possibly, especially if the agreement says default or continuing interest applies.

Yes, although managing different dates can make administration more difficult.

Yes. Startup and private company investments can result in a total loss.

The investor may claim as a creditor, but there may not be enough money or assets to repay everyone.

Many private company investments are not protected against investment loss by the Financial Services Compensation Scheme. Investors should check the exact arrangement.

Not automatically. Debt may rank ahead of shares, but a failing company may still have nothing available for repayment.

Yes. A company can run out of cash even when it owns valuable ideas or assets.

Default is a serious failure to follow the agreement, such as not paying an amount when due.

It is a listed event that may give the investor extra rights, such as demanding repayment.

Insolvency generally means a company cannot pay its debts or its liabilities exceed its assets under the relevant legal test.

Ranking describes the order in which different creditors and investors may be paid.

Secured debt is supported by legal rights over particular assets.

No. Many startup CLNs are unsecured.

It is debt without specific assets pledged as security, which can increase the risk of non-payment.

Possibly. Conversion and later investment can change voting percentages and governance rights.

Yes. Large amounts of convertible debt can create heavy dilution or repayment pressure.

It is the risk of placing too much money into one company or one type of investment.

Yes. It creates legal rights and obligations between the parties.

It is sensible to obtain qualified legal advice because small drafting differences can have large financial effects.

They can find templates, but a generic document may not match the company, investment or law involved.

Usually the directors should properly consider and approve the transaction, subject to the company's documents and law.

Approval may be required depending on directors' authority, pre-emption rights, articles and shareholder agreements.

They can give existing shareholders the first opportunity to buy new shares before they are offered to others.

It is the company's official legal record of its shareholders.

A capitalisation table shows who owns shares, options or other rights to ownership.

It is often shown separately as a potential future ownership interest so people can understand possible dilution.

Yes, if the agreement permits changes and the required parties consent.

A deed is a formal legal document with special signing requirements. Some investment documents may be executed as deeds.

The company should keep the signed agreement, approvals, payment records, calculations, notices and updated company registers.

Only if the agreement permits assignment or transfer and any required consent is obtained.

The agreement normally identifies a governing law, such as the law of England and Wales.

The document may require negotiation, court proceedings, arbitration or another dispute process.

Investment promotions can be restricted. A company should obtain advice before communicating an invitation or inducement to invest.

It is broadly a communication that invites or encourages someone to take part in investment activity.

Not every private agreement is directly supervised in the same way, but regulated activities and financial promotion rules may still apply.

Yes. A post, video, website or direct message may be a financial promotion depending on its content and context.

A company should not describe a risky investment as guaranteed unless a genuine and legally effective guarantee exists.

It generally refers to investments where people may lose all their money and where selling the investment may be difficult.

They help readers understand that the investment can fail and that returns are not guaranteed.

Possibly, but the laws of their country and the company's country may both need to be considered.

Interest can have tax consequences for the investor and the company. The result depends on the parties and circumstances.

It may. Conversion can have tax and accounting effects, so professional advice may be needed.

Accounting treatment depends on the terms. The instrument may contain debt and equity features.

Convertible instruments do not automatically qualify. The structure and timing must meet detailed requirements.

Yes, particularly when the amount is significant or more than one country is involved.

Receiving loan principal is not normally treated in the same way as ordinary trading income, but the full tax position depends on the facts.

Sometimes, but tax rules and restrictions can affect whether a deduction is available.

The signed note, payment evidence, interest calculations, conversion notices and share records can all be important.

A SAFE is usually a contractual right to future equity and often does not operate like traditional debt. A CLN begins as debt.

Debt is money owed. Equity is ownership in a company.

Ordinary shares create ownership immediately, while a CLN may create ownership later.

A CLN is initially debt. Preference shares are ownership shares carrying special rights.

Crowdfunding is a way of raising money from many people. A crowdfunding campaign may use shares, loans, rewards or other structures.

Both can be debt instruments, but bonds are often more standardised and may be issued to a broader market.

An overdraft allows borrowing through a bank account. A CLN is a specific investment contract that may convert into shares.

Neither is always better. The right choice depends on valuation, risk, rights, timing and the needs of both parties.

An investor lends £10,000 to a startup. A year later, the startup raises a qualifying funding round. The £10,000 and any convertible interest are exchanged for shares using the formula in the note.

New investors pay £1 per share. A CLN investor has a 20 percent discount, so the simple discounted conversion price is 80 pence per share.

A later round values the company at £10 million, but the note has a £5 million cap. The conversion calculation may use the lower capped valuation, giving the note investor more shares.

The note may convert, be repaid with a premium or follow another sale provision written into the agreement.

The maturity rules become important. The note may become repayable, convert using a set formula or be extended.

It may not meet the definition of a qualifying funding round, so automatic conversion may not occur.

The same principles apply as with a larger amount, but fees, legal costs and eligibility rules may make small investments less practical.

The investor should read the entire note, risk warnings, company information, articles, shareholder documents and any investment memorandum.

It should explain the risks, use of funds, conversion formula, maturity, interest, investor rights and possible dilution.

A CLN starts as debt. It may convert into shares. Every agreement is different. The investor can lose everything. Professional advice may be necessary.