Create a bespoke document in minutes, or upload and review your own.
Get your first 2 documents free
Your data doesn't train Genie's AI
You keep IP ownership of your information
Cookies Policy
I need a cookies policy that clearly explains data collection, storage, and sharing practices, with user consent options, covering a 12-month period, and compliant with GDPR and CCPA regulations.
What is a Convertible Loan Note?
A Convertible Loan Note lets investors lend money to startups with the option to convert their loan into equity shares later. It works like a regular loan with interest, but gives lenders the right to become shareholders instead of getting repaid, usually when the company raises its next funding round.
Startup founders often prefer these notes because they don't have to set a firm company valuation right away. The conversion usually happens at a discount to the next round's share price, rewarding early investors for their risk. Under U.S. securities laws, these notes count as securities and must follow SEC regulations, including proper documentation and investor qualification rules.
When should you use a Convertible Loan Note?
Use a Convertible Loan Note when your startup needs quick funding but setting a firm valuation feels premature or risky. This tool works especially well for early-stage companies raising their first round of capital, typically between $50,000 and $1 million, where traditional equity financing might be too complex or expensive.
These notes make sense when you expect a larger funding round within 12-24 months. They let you delay valuation discussions while giving investors the security of debt plus the upside of future equity. They're particularly valuable in fast-moving markets where your company's worth might change significantly before the next funding round.
What are the different types of Convertible Loan Note?
- Standard Notes: Basic convertible loan notes with simple interest and conversion terms, typically used for seed funding under $500,000
- SAFE-Style Notes: Similar to Y Combinator's SAFE agreements, offering uncapped conversion with an optional discount rate
- Capped Notes: Include a maximum valuation cap to protect investors during conversion, popular in Series A bridge rounds
- Interest-Free Notes: Structured without interest payments but offering deeper conversion discounts, common in accelerator programs
- Rolling Notes: Allow multiple closings under the same terms, useful for ongoing fundraising campaigns
Who should typically use a Convertible Loan Note?
- Startup Founders: Initiate and sign these notes when seeking early-stage funding without immediately setting a company valuation
- Angel Investors: Provide the initial capital and negotiate key terms like interest rates, conversion discounts, and valuation caps
- Corporate Attorneys: Draft and review the notes to ensure SEC compliance and protect both parties' interests
- Financial Officers: Track note terms, interest accrual, and conversion triggers within the company's books
- Board Members: Approve the issuance of notes and oversee conversion events during future funding rounds
How do you write a Convertible Loan Note?
- Investment Terms: Determine the loan amount, interest rate, maturity date, and qualified financing threshold
- Conversion Details: Decide on valuation cap, discount rate, and specific events that trigger conversion
- Company Information: Gather current capitalization table, corporate documents, and board approval for note issuance
- Investor Details: Collect accreditation status, investment entity information, and tax documentation
- Security Measures: Ensure SEC compliance for private placement exemptions and prepare required disclosures
- Documentation Platform: Use our automated system to generate legally compliant notes with all required elements
What should be included in a Convertible Loan Note?
- Principal Terms: Clear statement of loan amount, interest rate, and maturity date
- Conversion Mechanics: Detailed triggers, calculation methods, and share class specifications
- Qualified Financing: Definition of events that trigger automatic conversion rights
- Security Status: Declaration of the note as a security under SEC regulations
- Default Provisions: Consequences and remedies for payment or covenant breaches
- Amendment Terms: Rules for modifying note terms with majority noteholder approval
- Signature Block: Proper execution spaces for company officers and investors
What's the difference between a Convertible Loan Note and a Promissory Note?
A Convertible Loan Note differs significantly from a Promissory Note in several key aspects. While both are debt instruments, they serve different purposes and offer distinct advantages.
- Conversion Rights: Convertible Loan Notes include the option to convert debt to equity, while Promissory Notes remain pure debt instruments with no equity conversion features
- Investment Purpose: Convertible Notes are designed for startup funding and future equity participation, whereas Promissory Notes typically handle straightforward lending arrangements
- Regulatory Requirements: Convertible Notes must comply with SEC securities regulations, but Promissory Notes follow simpler lending laws
- Terms Complexity: Convertible Notes include valuation caps, discount rates, and conversion triggers; Promissory Notes mainly focus on payment terms and interest rates
Download our whitepaper on the future of AI in Legal
³Ò±ð²Ô¾±±ð’s Security Promise
Genie is the safest place to draft. Here’s how we prioritise your privacy and security.
Your documents are private:
We do not train on your data; ³Ò±ð²Ô¾±±ð’s AI improves independently
All data stored on Genie is private to your organisation
Your documents are protected:
Your documents are protected by ultra-secure 256-bit encryption
Our bank-grade security infrastructure undergoes regular external audits
We are ISO27001 certified, so your data is secure
Organizational security
You retain IP ownership of your documents
You have full control over your data and who gets to see it
Innovation in privacy:
Genie partnered with the Computational Privacy Department at Imperial College London
Together, we ran a £1 million research project on privacy and anonymity in legal contracts
Want to know more?
Visit our for more details and real-time security updates.
Read our Privacy Policy.