Convertible Loan Notes
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What are Convertible Loan Notes?
Convertible Loan Notes (CLNs) are a type of debt instruments commonly used in startup financing. They start as a loan, where an investor provides capital to a company, but instead of receiving repayment in cash, the loan can convert into equity (shares in the company) at a later date, typically during a future funding round.
Here’s a breakdown of the key points:
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Debt and Conversion: The loan is initially treated as debt, but it can convert into equity under certain conditions, such as a new round of funding.
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Discount & Valuation Cap: Often, convertible loan notes come with a discount (e.g., 20%) on the price per share in the next funding round, or a valuation cap, which sets a maximum company valuation for conversion, protecting investors if the company’s value increases significantly.
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Interest: CLNs may also accrue interest, which can either be paid or added to the loan amount upon conversion.
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Flexibility: CLNs are popular for early-stage investments because they allow companies to raise capital quickly without having to set a valuation for the company, which can be difficult or time-consuming at an early stage.
They’re a win-win for both startups and investors, offering flexibility and potential upside for the investor, while allowing the company to delay valuation discussions.
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