Convertible Loan Note (Simple)

What is the document?

A Convertible Loan Note (Simple) is a legal agreement where an investor lends money to a company with the option to convert that loan into shares at a later date, usually during a future funding round. It outlines key terms such as the loan amount, interest rate, conversion terms, and any applicable discount or valuation cap.

Why is it used?

This document is used to provide quick and flexible funding to a company without immediately determining its valuation. It allows businesses to raise capital efficiently while giving investors the opportunity to convert their loan into equity under favourable terms in the future.

Where is it used?

Convertible Loan Notes are commonly used in early-stage companies and start-ups, particularly during seed or pre-seed funding rounds. They are used in private investment agreements between companies and investors.

Who uses it?

• Start-ups and growing companies
• Angel investors and venture capitalists
• Company directors and founders
• Legal and financial advisors

Benefits

A Convertible Loan Note offers several advantages. It enables faster fundraising compared to issuing shares immediately, as it delays complex valuation discussions. It provides flexibility for both the company and the investor, with the potential for the investor to benefit from discounted share prices in the future. Additionally, it reduces initial legal costs and simplifies the investment process while still ensuring legal protection for both parties.