Varies according to business and investor
Usually 12-24 months
Equity stake in your business at a discount, and in some cases a low interest rate
Weeks or months (as per most equity negotiations)
High-growth start-ups or more mature businesses looking for upfront cash ahead of a future funding round, and needing more protection than an ASA.
A Convertible Loan Note (CLN) is a form of debt that converts into equity under certain circumstances, most commonly at a future qualifying funding round. This means investors who loan money to a business under a CLN agreement usually receive equity in the company, at a discounted rate, instead of a return in the form of principal plus interest.
A Convertible Loan Note is a debt instrument with a mechanism that allows the principal amount (plus interest, if any) to convert into equity at a future date in the following circumstances:
You’ll often see a CLN used in funding rounds where the valuation of the company is unknown or uncertain. It can reward investors who come on board early, without causing valuation issues down the line.
Discount rate and valuation cap
If the CLN converts to equity (e.g. at the next qualifying funding round) the amount of equity that the CLN will convert into depends on the price of the equity at this next round. It also depends on two key elements – the discount rate and the valuation cap.
Convertible Loan Notes often have zero or low interest rates, or where interest does accrue it’s rolled up and converted into shares along with the principal amount (i.e. ‘capitalised interest’).