What Is a CLN (Convertible Loan Note)?

CLN (Convertible Loan Note) meaning

The CLN meaning combines elements of both debt and equity. To define CLN in practice, investors lend money to a company under agreed terms, and that loan converts into shares when a qualifying funding round occurs.

A clear CLN definition typically includes:

• An interest rate
• A maturity date
• A conversion discount
• Often, a valuation cap
• Defined conversion triggers

Unlike an Advance Subscription Agreement (ASA), a CLN is legally debt until it converts. This means it usually appears as a liability on the company’s balance sheet, which can influence both investor perception and risk assessment.

How a CLN works in practice

The mechanics usually follow this sequence:

1. The investor provides capital as a loan.
2. Interest accrues over time (unless structured otherwise).
3. At a defined trigger event, most commonly the next priced funding round, the loan (plus accrued interest) converts into equity.
4. The conversion price is typically lower than the price paid by new investors due to the agreed discount or valuation cap.

If no qualifying round occurs before the maturity date, the CLN may:

• Convert at a predefined mechanism; or
• Become repayable (depending on drafting).

This repayment feature is one reason CLNs carry a different risk profile from equity-only instruments.

Key CLN features explained

Interest

CLNs usually carry interest, often accruing and converting into shares alongside the principal. This increases the number of shares issued at conversion and therefore affects dilution.

Maturity date

The maturity date sets a deadline for conversion or repayment. If the company has not raised a qualifying round by this date, the note terms dictate what happens next.

Discount

The discount reduces the price at which the CLN converts compared to the next round’s share price. For example, a 20% discount means the note converts at 80% of the new round price.

Valuation cap

A valuation cap sets a maximum company valuation for conversion purposes. If the next round valuation exceeds the cap, the CLN converts at the capped valuation, protecting the investor from excessive price increases before conversion.

CLN vs ASA: key differences

Although both defer valuation, there are structural differences:

• Legal nature: A CLN is debt; an ASA is structured as an advance payment for shares.
• Interest: CLNs typically accrue interest; ASAs usually do not.
• Repayment risk: CLNs may become repayable at maturity; ASAs are often drafted to avoid repayment mechanics.
• Tax positioning: CLNs can complicate SEIS/EIS eligibility because of their debt characteristics.

For founders seeking SEIS/EIS alignment, structure, and drafting are critical.

Why companies use CLNs

CLNs are often used in:

• Bridge rounds between larger financings
• Situations where valuation is still under discussion
• Time-sensitive capital raises
• Insider extensions from existing investors

They are generally faster to negotiate than a full-priced equity round and can be familiar to investors who are comfortable with debt-style instruments.

Practical considerations for founders

Before issuing a CLN, founders should model:

• The dilution impact of discount and cap mechanics
• The effect of accrued interest on share count
• What happens at maturity if a funding round does not close
• Balance sheet implications of carrying debt

CLNs can be powerful tools when used strategically, but they require careful drafting and forward planning to avoid unintended consequences.

How UndoCapital supports CLNs

Undo Capital works with founders to structure Convertible Loan Notes (CLNs) in a way that balances speed of fundraising with long-term cap table clarity. This includes advising on key terms such as interest, maturity dates, discounts and valuation caps, modelling conversion outcomes across different scenarios, and ensuring the instrument aligns with future priced rounds, so bridge capital solves short-term needs without creating unintended dilution or structural complexity later.