Fundraising & Equity generatorUnited Kingdom
Convertible Loan Note Instrument (England & Wales)
A convertible loan note instrument under which an investor lends money to a company that converts into equity at a future round (at a discount and/or cap), with interest and a maturity/redemption backstop. This is genuine debt, and it does NOT qualify for SEIS/EIS.
What is a Convertible Loan Note Instrument?
A Convertible Loan Note Instrument (England & Wales) documents a loan from an investor to a company that converts into equity at a future round (at a discount and/or cap), with interest and a maturity/redemption backstop. This is genuine debt, and it does NOT qualify for SEIS/EIS.
UK companies raising bridge finance where the investor is content to take debt (and does not need SEIS/EIS), and investors who want interest and a repayment right if no round occurs.
Convertible Loan Note Instrument template, current for 2026
The 2026 refresh brings the Companies Act 2006 instrument-of-loan-notes structure, security/subordination options, interest that reflects genuine debt, and an explicit warning that this instrument is not SEIS/EIS-eligible (use an ASA for that).
How HDAi does this differently
Unlike a static form, HDAi runs a guided interview and assembles your Convertible Loan Note Instrument as you answer. When you want it finished, a licensed Hart David Carson attorney reviews it and tailors it to your facts before you sign. The interview and the first draft are automated. The judgment belongs to an attorney.
What you’ll be asked
A short interview in plain language that asks only what this document needs.
- Which company is issuing the loan notes (the borrower)? This is the company that receives the loan and whose shares the notes convert into. We capture its full registered name, company number and registered office.
- What is the company's Companies House number? The eight-character registered number on the certificate of incorporation. Leave blank if the company is not yet incorporated.
- Where is the company incorporated? The instrument is drafted for England & Wales law and Companies Act 2006 mechanics; confirm the company is a UK company so the conversion and share-issue provisions fit.
- Who is the lead / first investor (noteholder)? The person or fund lending the money and receiving notes. If there are several investors they each sign a subscription or adherence; capture the lead here.
- Will more than one investor subscribe under this instrument? An instrument can be a single bilateral note or a series constituted for multiple noteholders. This changes whether we include a register of noteholders and majority-consent (noteholder-vote) mechanics.
- What is the total principal amount to be advanced (the note subscription amount)? The face value of the notes to be issued. For a series this is the maximum aggregate that can be issued under the instrument.
- What is the date of this instrument / issue date of the notes? The instrument is dated and interest typically accrues from this date. Advances may be made on or shortly after this date.
- When do the notes mature (the long-stop redemption date)? If no qualifying funding round or exit happens first, the notes fall due on maturity; the investor can then demand repayment or (if elected) convert. A typical UK convertible is 12 to 36 months.
- What is the fixed maturity date? The exact long-stop date on which the notes must be repaid or converted if no earlier trigger occurred.
- What annual interest rate applies to the notes? Convertible notes usually carry interest (commonly 5 to 10% simple). Interest either rolls up and converts with principal, or is paid on redemption. Enter 0 if the notes are non-interest-bearing.
- How does interest accrue? Simple interest is the market norm for early-stage convertibles; compounding increases the return. This drives the redemption-amount calculation. Only relevant if the rate is not zero.
- On conversion, how is accrued interest treated? Interest can convert into shares alongside principal (increasing the shares issued), or be paid in cash on conversion, or be waived. Rolling it into the conversion is most common. Only relevant if the rate is not zero.
- What minimum new-money amount makes a financing round a 'Qualifying Financing' that triggers automatic conversion? Automatic conversion normally fires only on a bona fide equity round raising at least this threshold, so small top-ups do not force conversion. Enter the gross new investment threshold.
- What conversion discount applies at a Qualifying Financing? The discount rewards the investor for early risk: notes convert at a percentage below the price paid by new-round investors. 15 to 25% is typical. Enter 0 if there is no discount.
- Is there a valuation cap on the conversion price? A cap sets a maximum company valuation at which the notes convert, protecting the investor if the next round prices very high. The investor gets the better of the cap price and the discount price.
- What is the valuation cap (fully-diluted)? The company valuation ceiling used to derive the capped conversion price. The lower of the capped price and the discounted round price applies.
- Is the valuation cap measured pre-money or post-money? Pre-money and post-money caps produce different ownership outcomes. Be explicit, because this is a frequent source of disputes.
- How should 'Fully Diluted Share Capital' be scoped for the cap and conversion price? The fully-diluted count is the single most-litigated point in a UK CLN conversion. A broad count (all options, warrants, convertibles, ASAs and the enlarged option pool) lowers the price per share and gives noteholders more shares; a narrower count is more company-favourable. This selection is recorded so both sides are explicit.
- For the fully-diluted count, do the converting Notes themselves count as issued shares? Including the shares issuable on conversion of these Notes (and other converting instruments) in the denominator materially changes the price per share, and so does excluding them. State the treatment expressly to avoid a dispute at conversion.
- At a Qualifying Financing, is the cap/discount price struck before or after any new or expanded option pool? This is the practical face of the fully-diluted definition. A 'pre-money pool' is included in the fully-diluted count before conversion, so existing holders and converting noteholders bear the pool dilution (company/new-investor favourable). A 'post-money pool' is excluded from the pricing count, so the new-round investors bear it after conversion (noteholder favourable).
- Into what class of shares do the notes convert at a Qualifying Financing? Usually the same class of shares issued to the new-round investors (e.g. Series A Preferred), so noteholders sit alongside them on the same terms.
- What is the name of that preferred/specified share class? Used where conversion is into a named class rather than whatever the new round issues.
- If the notes convert at MATURITY (with no round to match), which class do they take? Where the Qualifying-Financing class is 'the same as the new round', a maturity conversion has no round to point to. Choosing 'Ordinary Shares' silently drops the noteholder below any preferred; the market-standard fix is to convert into the most senior preferred class then in issue, or a named class. Choose deliberately.
- If the notes reach maturity with no Qualifying Financing, what happens? This is the backstop. The notes can be repaid in cash, converted at the cap or an agreed price at the investor's election, or converted automatically. Investor-elected conversion is common.
- If notes convert at maturity, at what price? With no round price to discount, maturity conversion needs its own basis: typically the valuation cap, or a separately agreed price or most-recent-round price.
- What agreed valuation applies to a maturity conversion? The fully-diluted valuation used to price shares if the notes convert at maturity absent a cap or recent round.
- Does the company currently have the share-allotment authorities needed to issue conversion shares? Automatic conversion only works if the directors hold an authority to allot under section 551 of the Companies Act 2006 and a disapplication of statutory pre-emption under sections 570 or 571 (or equivalent article provisions). The instrument makes conversion conditional on these being in place and adds a covenant to procure them; confirm the current position so it can be flagged for the solicitor.
- Under which financial-promotion exemption does the lead investor qualify? The instrument relies on exemptions from the FSMA financial-promotion and prospectus rules, so each investor must warrant its exempt status. Pick the category that fits the lead investor; other investors give the same warranty for themselves on adherence.
- On a sale/exit before conversion, does the investor get a repayment premium? Many convertibles give the investor a choice on an exit: convert (using the cap/discount) OR take repayment of principal plus a multiple of the money back (e.g. 1x or 2x). This protects downside on an early sale.
- What repayment multiple applies on an exit? e.g. 1.5 means the investor can take 1.5x the principal back on a sale instead of converting.
- Are the notes secured or unsecured? Early-stage convertibles are usually unsecured. Security (a debenture/charge) requires separate documents and Companies House registration; flag if intended so it can be cross-referenced.
- How do the notes rank against the company's other debt? The notes can rank as ordinary unsecured obligations, sit behind senior lenders, or rank equally with them.
- May the company repay the notes early (voluntary prepayment)? Investors often want to block early repayment so they keep conversion upside. If allowed, it usually needs noteholder consent.
- Should the investor receive information rights (accounts / updates)? Gives the noteholder periodic financials and notice of a financing while the notes are outstanding: light governance without a board seat.
- Include a 'most favoured nation' clause? An MFN lets this investor take the benefit of any better economic terms (lower cap, higher discount) granted to a later noteholder under the same round. Common for the first money in.
- Which law governs the instrument and which courts have jurisdiction? For an England & Wales company this is almost always English law and the English courts.
- Who signs for the company (director name)? The instrument is executed by the company. Under s.44 Companies Act 2006 that is by two directors, a director and secretary, or one director whose signature is witnessed.
- How will the company execute this instrument? Selects the correct execution block under s.44 Companies Act 2006.
- Who is the second signatory (director or secretary)? Needed when executing by two directors or director-and-secretary.
Frequently asked
About the Convertible Loan Note Instrument and how HDAi works.
What is a Convertible Loan Note Instrument (England & Wales)? +
A Convertible Loan Note Instrument (England & Wales) documents a loan from an investor to a company that converts into equity at a future round (at a discount and/or cap), with interest and a maturity/redemption backstop. This is genuine debt, and it does NOT qualify for SEIS/EIS. UK companies use it to raise bridge finance where the investor is content to take debt (and does not need SEIS/EIS), and investors use it when they want interest and a repayment right if no round occurs.
Is HDAi's Convertible Loan Note Instrument (England & Wales) legally binding? +
The Convertible Loan Note Instrument (England & Wales) HDAi generates becomes binding once it is completed, reviewed, and properly signed. A Hart David Carson attorney can review the commercial terms from a US-law perspective after a planning call and, because the instrument is governed by English law, coordinates with locally admitted counsel (quoted separately) before you sign.
Do I need a lawyer to use this Convertible Loan Note Instrument (England & Wales)? +
You can generate and download the Convertible Loan Note Instrument (England & Wales) in minutes, free of charge. If you want it finished, a licensed Hart David Carson attorney reviews the conversion mechanics, the maturity terms, and the allotment authorities with you and brings in locally admitted English counsel where the instrument needs it.
What makes this Convertible Loan Note Instrument (England & Wales) current for 2026? +
The 2026 refresh brings the Companies Act 2006 instrument-of-loan-notes structure, security/subordination options, interest that reflects genuine debt, and an explicit warning that this instrument is not SEIS/EIS-eligible (use an ASA for that).
How long does the Convertible Loan Note Instrument (England & Wales) take? +
Estimated time about 20 min (39 questions), depending on how much you already know. The document assembles as you answer. Export it as PDF or Word, or send it to a Hart David Carson attorney for review.
Does this Convertible Loan Note Instrument (England & Wales) work in the United Kingdom? +
Yes. This version is drafted for United Kingdom law and terminology. It is not a relabeled U.S. form. A licensed attorney coordinates with locally admitted counsel where required.
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