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An Introduction to Convertible Loan Notes on Clara
An Introduction to Convertible Loan Notes on Clara
Updated over a week ago

Sort your funding quickly and focus on growth, with a well-established and standardised method of funding, that delays the need to decide a fixed valuation until a later date.

What is a Convertible Loan Note? 

A Convertible Loan Note is a convertible instrument that may convert to shares at your startup’s next equity funding round. When the loan amount converts into shares, the Convertible Loan Note holder will become a shareholder in your startup, taking the same class of shares issued in that equity funding round. 

Why generate this document?

Like a SAFE, a Convertible Loan Note is shorter and simpler than the types of documentation used in later, larger investment rounds. The key terms of a Convertible Loan Note are well understood in the market, so there should be minimal negotiation from investors, saving both time and money.

What does the Clara Convertible Loan Note do?

  • Makes the investor a future shareholder in your startup’s topco, to take place when their loan is converted into shares.

  • Sets a discount at which the loan amount will convert into shares, in comparison to the price per share offered to the investors in your equity funding round. 

  • Sets a valuation cap – the maximum valuation at which the loan amount may convert into shares, regardless of the valuation agreed with investors in the next equity funding round. 

  • Has the option for you to grant the investor pro rata participation rights: the right to invest in the equity funding rounds in which the Convertible Loan Note converts to shares.

  • Has the option for you to grant investor “most favoured nation (MFN)” rights, meaning that if you grant any future investors rights more favourable than the ones in this Convertible Loan Note, the investor has the right to upgrade it to match.

  • Has the option for you to grant the investor certain information rights (such as access to accounts).

  • Requires the loan to be paid back or converted into shares if no equity funding round occurs by a specified date, at pre-determined “maturity conversion” valuation (sometimes set at the same level as the valuation cap). 

  • Uses a post-money valuation (the value of the company after an investment round), meaning that further funds received before a funding round (e.g. those received through other Convertible Loan Notes or SAFEs), would not dilute the investor’s equity. Most share options (e.g. under your Share Incentive Plan) would also act to dilute existing shareholders.

  • Is governed under English law with a dispute resolution mechanism using expedited ICC arbitration procedures to be held in a place you can select in the form.

Additional info

  • The main difference between a Convertible Loan Note and a SAFE (or a KISS) is that the Convertible Loan Note typically has a maturity date (i.e. a deadline after which the investment amount needs to either be repaid or converted to shares, regardless of whether an equity funding round has occurred). The Convertible Loan Note can also carry an interest rate. 

  • When you generate the Convertible Loan Note, you’ll be able to select whether interest is payable on the loan.

  • The Convertible Loan Note is based on post-money valuation (i.e. the startup's value after it has received funding), which means that any additional funds raised through convertible securities before an equity funding round (e.g. those received through Convertible Loan Notes or SAFEs), would dilute the existing shareholders but not the holders of the convertible securities. Most share options (e.g. under your Share Incentive Plan) would also act to dilute existing shareholders. 

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