What is a ‘Convertible Loan Note’?
Many start-up companies (SME) seek for ‘Convertible Loan Notes’ (CLN) under the legal assistance of an assigned lawyer, however what exactly is this?
A CLN is a short-term debt that can converted into equity shares. Most users of a CLN may decide to invest within a SME through a CLN, as usually the investor will receive a share price at a discounted rate, based upon the foreseeable valuation of the SME in question.
Although a CLN is not initially used for the purpose of equity, a notable characteristic of the CLN is that it has the ability to convert into equity at a later date. Any conversion that does occur is typically done on the next ‘qualifying funding round’, in which is usually set out in the Convertible Loan Note terms.
Another notable aspect to CLN is what is known as ‘coupon’. A ‘coupon’ is the amount of interest that is acquired during the period that the loan note is unconverted. However not all CLN’s will have this aspect attached.
If the SME fails to reach the initially set out funding target by a specific date, in which will lead the CLN from an investor not being converted into shares, then the investor shall be refunded in full.
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