Rose notes that terms are usually more strict if a convertible loan note is being used as a last resort. So, for example, if you took a convertible loan note as a seed-stage company with a 12-month maturity period, and in that time you raised a Series A which took you past the maximum valuation, the loan would then convert before the maturity date. Sometimes, but not always, convertible loan notes may also have a cap, meaning they convert into equity once your startup hits a certain maximum valuation. “What you often also see is a staggered discount, depending on when the conversion happens.” “I would say market standard is somewhere between 10-30% depending on the situation of the company,” says Blank. So, for example, if a company sells shares at £1 per share but the discount rate on its convertible note is 20%, new investors would have to pay full price while the convertible note holder would be able to purchase shares at £0.80. Rose says the UK’s Future Fund, which has issued hundreds of millions of investments via Future Fund convertible notes, set a standard: “8% simple interest, three-year maturity.”Īnother common convertible loan note term is a discount, which is a percentage reduction at which the note will convert relative to the next round. The maturity date is also important for founders, he adds, as “the longer the maturity date, the higher the interest and the discount at the end”. According to Michael Blank, head of the investment team at VC firm Verve Ventures, interest rates are usually between 2-10%. How do convertible loan notes work? What are the typical terms of a convertible loan note?Ĭommon convertible loan note terms include interest and a maturity date - the date on which the final loan payment must be made. Silicon Valley Bank also offers secured convertible loans, but currently only in the US. More specialised debt providers are incorporating convertibles into their offerings, and these are more likely to be secured. “Often with tech startups, security of this type is relatively meaningless as the company’s assets have little value when the company is early stage.” “A secured note simply gives the noteholder(s) security over the assets of the company and therefore some form of priority if the note isn’t repaid or converted,” says Mike Turner, emerging companies partner at law firm Latham & Watkins. Secured notes are when the lender has a legal claim against the borrower’s assets. “A convertible loan is a loan agreement between an investor and a company that's granted by the investor, that will ultimately either get paid back (that’s why it’s a loan agreement) or it will convert into equity, usually shares (that’s why it’s convertible),” says David Zwagemaker, partner at Peak, a founder-funded VC firm based around Europe.Īccording to Anthony Rose, founder and CEO of legal platform for startups SeedLegals, which offers convertible loan notes, most convertible notes issued by VCs are unsecured - which means a lender provides money to a borrower without any legal claim to the borrower's assets in case of default. You can think of a convertible loan note as a type of investment that sits between borrowing and equity.
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