Looking beyond valuation: Choosing the right investment agreement

Raising early-stage funding often means making decisions quickly—sometimes before you’ve had time to fully think through the long-term implications. One of the most important of these is choosing between a Convertible Loan Note (CLN) and an Advanced Subscription Agreement (ASA).

Both are commonly used to bring in investment before agreeing a valuation, with shares issued later—usually at a discount or subject to a valuation cap. But while they may look similar at first glance, they operate very differently in practice.

A Convertible Loan Note is, essentially, a loan. The investor lends money to the company, often with interest increasing over time. That loan may convert into shares when certain events occur, such as a future funding round. If conversion doesn’t happen, the company may be required to repay the loan at a maturity date. Until conversion, the investor is a creditor, which can come with additional rights and protections.

An Advanced Subscription Agreement works differently. Rather than lending money, the investor is effectively paying upfront for shares that will be issued later. There is no debt, no interest, and typically no right to repayment. This can reduce pressure on the company’s cash flow and keeps the capital structure simpler from the outset.

In many cases, the decision comes down to tax. ASAs can often be structured to qualify for Enterprise Investment Scheme (EIS) relief, which is a significant incentive for many angel investors and early-stage funds. CLNs, on the other hand, usually do not qualify, because the investor first holds debt rather than shares. This makes careful timing and drafting especially important.

CLNs tend to be more complex. They usually include detailed provisions around interest, repayment, conversion triggers, defaults, and investor protections. ASAs are generally more straightforward, but still require close attention—particularly when it comes to valuation caps, discounts, conversion mechanics, and maturity dates.

Please contact Kevin Withane kevin.withane@impactlawyers.co.uk for support with your funding round.