Convertible loan notes (CLNs)
An investor lends money to your company on the understanding that the loan will usually turn into shares later, often at a discount, when a set event such as the next funding round happens.
- No security
How it works
A convertible loan note starts as a loan from an investor. Instead of being repaid in cash, it normally converts into shares when a "trigger event" happens, such as a new funding round, a sale of the company or a listing.
A CLN agreement usually sets out:
- Conversion trigger: the event that turns the loan into shares.
- Discount: the investor gets shares at a lower price than new investors in that round.
- Valuation cap: the highest company valuation used for conversion, so early investors are protected if the valuation rises a lot.
- Interest: often between 2% and 8%, usually added to the loan and converted too.
- Maturity date: if no trigger event has happened by then, the loan converts or must be repaid with interest.
Because no valuation is needed up front, CLNs are often used by early-stage companies to raise money quickly between funding rounds.
Upsides and downsides
Upsides
- No need to agree a valuation now
- Usually quicker and cheaper to arrange than a full equity round, sometimes within days or weeks
- Interest rates are often lower than on traditional loans
- Flexible terms that can be negotiated with each investor
Downsides
- Founders are diluted when the notes convert, possibly more than expected if the valuation is low
- Investors usually cannot claim SEIS or EIS relief on CLNs, which can make them harder to sell to UK angels
- A generous discount or cap can put off future investors
- The return for both sides is uncertain until conversion
Risks
- If no trigger event happens by the maturity date, the company may have to repay the loan and interest in cash
- Complex terms across several notes can make later funding rounds harder
What it costs
- How it is priced
- Interest (often 2% to 8%) plus a conversion discount or valuation cap, paid in shares when the note converts
- Typical range
- Interest typically between 2% and 8%, according to British Business Bank guidance
- Costs that are easy to miss
- Legal fees for drafting the loan note agreement
- The conversion discount and valuation cap mean note holders get shares more cheaply than later investors
- You may need to change your articles of association to allow the notes to be issued
Agreed with each investor. There is no set minimum or maximum.
Does it fit?
Could fit when
- You are an early-stage limited company that needs money before the next funding round
- It is too early to agree a fair valuation
- Your investors do not need SEIS or EIS relief
Unlikely to fit when
- Your investors need SEIS or EIS relief (an advance subscription agreement or a priced share round may fit better)
- You could not repay the loan if the trigger event never happens
- You are a sole trader or partnership
Who can use it
- Business types: Private limited company, Public limited company
- Open to businesses with no sales yet
- Your articles of association must allow you to issue the notes, or be changed to do so
- CLNs do not qualify for SEIS or EIS tax relief unless specially structured to meet the conditions
Am I ready?
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- Business plan and cash flow forecast
- Articles of association checked
- Clear terms
Regulation and protections
There is no compensation scheme for you or the investor. Your protection comes from the loan note agreement, so take legal advice before you sign.
Inviting people to invest is a financial promotion, and UK rules restrict it. Check the rules before you approach investors you do not know.
Types of provider: Angel investors and syndicates; Venture capital funds; Existing shareholders.
Also consider
Sources
- British Business Bank: What are convertible loan notes? · checked 7 October 2026
- HMRC Venture Capital Schemes Manual VCM12025: EIS advance subscription agreements · checked 7 October 2026
- FCA: PS22/10 Strengthening our financial promotion rules for high-risk investments · checked 7 October 2026