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A Convertible Loan Note is a popular startup funding tool that starts as a loan but can turn into shares later. It lets early-stage Australian companies get quick funding without having to set a firm company value right away. Think of it as a smart middle ground between a regular loan and selling shares straight away.

These notes typically convert to equity when specific triggers happen, like a major funding round or sale. For founders, it means quick access to capital while keeping control. For investors, it offers the security of debt plus the potential upside of equity investment. Under ASIC regulations, they're considered financial products and need proper documentation, usually through a formal deed structure.

Consider using a Convertible Loan Note when your startup needs quick funding but you're not ready to set a firm company valuation. This tool works especially well during seed rounds or bridge financing, where traditional equity deals might be too complex or time-consuming. It's particularly useful for Australian tech startups between major funding rounds or when testing new markets.

These notes make sense when you need capital within weeks, not months, and your investors want the flexibility to convert their loan to shares later. They're ideal for raising between $50,000 and $2 million, especially when you expect a larger funding round within 12-24 months. Just ensure compliance with ASIC's convertible security regulations before proceeding.

• Simple Convertible Notes: Basic structure with fixed interest rate and maturity date, commonly used by early-stage startups for straightforward funding rounds under $500,000
• Discount-Based Notes: Include a discount rate (typically 10-30%) on future equity pricing, giving early investors better terms than later investors
• Valuation Cap Notes: Set a maximum company valuation for conversion, protecting investors if the company's value rises significantly
• Interest-Free Notes: Used for short-term bridges or family funding, focusing on equity conversion without accruing interest
• Hybrid Notes: Combine multiple features like valuation caps, discounts, and interest rates, popular among sophisticated angel investors and venture capital firms

• Startup Founders: Sign as company directors and manage the terms of conversion, often seeking quick capital without immediate equity dilution
• Angel Investors: Provide the initial funding and negotiate key terms like valuation caps and discount rates
• Corporate Lawyers: Draft and review the Convertible Loan Note terms, ensuring ASIC compliance and proper documentation
• Company Secretaries: Maintain official records and handle regulatory filings related to the notes
• Venture Capital Firms: Often involved in larger rounds, helping set conversion triggers and participating in future equity rounds

• Company Details: Gather current shareholding structure, company registration details, and latest financial statements
• Investment Terms: Define loan amount, interest rate, maturity date, and any agreed valuation cap
• Conversion Triggers: Specify qualifying funding rounds, exit events, or other conditions that will trigger conversion
• Investor Information: Collect full legal names, addresses, and ACN/ABN numbers of all participating investors
• Board Approval: Secure written board resolution approving the note issuance and its terms
• ASIC Compliance: Check current regulatory requirements for convertible security offerings in your category

• Parties and Definitions: Full legal names, ACN/ABN numbers, and clear definitions of key terms
• Loan Terms: Principal amount, interest rate, maturity date, and repayment conditions
• Conversion Mechanics: Detailed triggers, valuation methodology, and share class specifications
• Security Provisions: Any collateral arrangements and priority status of the note
• Default Events: Clear listing of circumstances triggering default and remedies
• Governing Law: Explicit statement of Australian jurisdiction and applicable state law
• Execution Block: Proper signing sections for all parties, including witness requirements

A Convertible Loan Note differs significantly from a standard Loan Agreement in several key ways, particularly in its hybrid nature and future equity conversion options. Understanding these differences is crucial for Australian startups and investors choosing between funding instruments.

• Purpose and Intent: Convertible Loan Notes aim for eventual equity conversion, while Loan Agreements focus purely on debt repayment with interest
• Repayment Structure: Loan Agreements require fixed repayment schedules, whereas Convertible Notes typically convert to shares at specific trigger events
• Risk Profile: Convertible Notes offer potential equity upside for investors, making them more suitable for high-growth startups than traditional loans
• Documentation Complexity: Convertible Notes include additional terms for conversion mechanics, valuation caps, and discount rates not found in standard loans
• Regulatory Treatment: Under ASIC guidelines, Convertible Notes face different compliance requirements regarding disclosure and investor qualifications