Module 2 · Chapter 4

Convertible Loan Notes

A convertible loan note is a loan that is meant to turn into shares at the next round. This chapter reads one note instrument and asks what happens if the round never comes.

≈ 14 min read 8-question test

In this chapter

  • What a convertible loan note is, and why funds use it
  • The three ways a note ends: conversion, repayment or a sale
  • What the noteholders gave up, and what they took instead

4.1Convertible loan notes in one paragraph

A convertible loan note is a loan to a company that is meant to become shares. The investor lends money now, and at the next funding round the loan turns into shares at a discount to that round's price. If the round never comes, the company must repay the loan on a fixed date, with interest. Investors use notes when nobody can yet agree what the company is worth.

Key point

A note is a debt with a date on it. Everyone hopes it will turn into shares before that date. If it does not, the company must repay it in cash.

Also in this chapter

  1. Why the funds lent instead of subscribing
  2. One instrument, one register
  3. Interest that disappears on conversion
  4. Conversion at the next round
  5. Repayment if the round never comes
  6. Unsecured: where noteholders stand if the company fails
  7. A sale before the round: twice the money
  8. Majority rule among the noteholders
  9. Your job

Preview

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