Convertible loan note

Also called CLN, Convertible note, ASA, Advance subscription agreement

Money now, shares later, at a price decided by a future round. Fast to document and easy to misunderstand.

What it means

A convertible loan note is a loan that converts into shares on a defined trigger — usually the next equity round — instead of being repaid. An advance subscription agreement is similar but is not a loan and cannot be repaid, which matters for SEIS and EIS eligibility.

Typical terms: a discount to the next round's price, a valuation cap, an interest rate, and a long-stop date.

Why it matters

It defers the valuation argument, which is why early-stage rounds use it: agreeing a price for a company with no revenue is difficult and the negotiation is expensive relative to the sum involved.

The cost is that the dilution is unknown until conversion, and founders regularly discover it is larger than they pictured.

What it looks like in practice

Model the conversion at several possible next-round valuations before signing. A low cap combined with a discount can convert into a much larger stake than the cash suggests.

Watch what happens if there is no next round: does it repay, convert at a default valuation, or sit there?

For SEIS/EIS purposes, a convertible loan note generally does not qualify — an ASA structured correctly may. This is a common and expensive misunderstanding.

What to watch out for

Stacking several notes with different caps and discounts, which produces a cap table nobody can model and a difficult conversation at the next round.

Interest that also converts, increasing the dilution quietly.

Where to get proper advice

A corporate solicitor, and a tax adviser specifically on the SEIS/EIS point before money changes hands.