Convertible Loan Notes: A Brief Summary

Instead of going straight into an equity funding round (i.e. the issue of shares in exchange for funds) some companies initially raise money through a type of debt funding, known as convertible loan notes, in order to prove a concept, start trading or to stay afloat. They are also used at later stages as bridging finance in order to keep a company trading in anticipation of a sale or listing. However, this note focusses on the first use. I have provided a brief summary of what a convertible loan note is and their advantages, disadvantages and common terms.

What is a convertible loan note?

Convertible loan notes are essentially loans which bear interest and are repayable at some point in the future, except that they convert into equity (i.e. shares in the borrower company) in certain circumstances (usually a future equity funding round or a sale of the company). This is essentially the whole point of a convertible loan note.