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Convertible Loan Note Agreement for the United Kingdom

Convertible Loan Note Agreement Template for England and Wales

A Convertible Loan Note Agreement under English and Welsh law is a sophisticated financing instrument that combines elements of debt and potential equity investment. It documents the terms under which an investor provides a loan to a company, with the distinctive feature that the loan amount can be converted into equity shares under specified conditions. The agreement covers crucial aspects including interest rates, conversion mechanics, repayment terms, and investor protections, all within the framework of English and Welsh corporate and securities law.

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Convertible Loan Note Agreement

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What is a Convertible Loan Note Agreement?

A Convertible Loan Note Agreement is commonly used in early-stage financing where company valuation might be difficult or premature. This document, governed by English and Welsh law, provides a flexible financing solution that offers investors the security of debt with the upside potential of equity. The agreement typically includes detailed provisions on conversion triggers (such as qualified funding rounds or exits), conversion price calculations, and investor protections. It's particularly popular in startup financing as it delays the need for complex company valuation discussions while providing investors with the option to convert their loan into equity at a later stage, usually at a discount to the next funding round.

What sections should be included in a Convertible Loan Note Agreement?

1. Parties: Identification of the lender(s) and borrower(s)

2. Background: Context of the loan and conversion rights

3. Definitions and Interpretation: Key terms used throughout the agreement

4. Subscription and Issue: Terms of loan note subscription and issuance

5. Interest: Interest rate, calculation and payment terms

6. Conversion Rights: Terms and mechanics of conversion into shares

7. Repayment: Terms for repayment of the loan

8. Events of Default: Circumstances constituting default and consequences

9. Warranties and Representations: Company and investor warranties

What sections are optional to include in a Convertible Loan Note Agreement?

1. Security: Security arrangements if loan is secured against assets

2. Information Rights: Investor information and inspection rights for enhanced transparency

3. Anti-dilution Protection: Protection mechanisms against share dilution for sophisticated investors

What schedules should be included in a Convertible Loan Note Agreement?

1. Form of Conversion Notice: Template notice for exercising conversion rights

2. Conditions Precedent: Conditions to be satisfied before completion

3. Details of the Company: Company information including capital structure

4. Calculation of Conversion Price: Formula and mechanisms for determining conversion price

5. Form of Loan Note Certificate: Template certificate evidencing the loan notes

Authors

Alex Denne

Head of Growth (Open Source Law) @ Genie AI | 3 x UCL-Certified in Contract Law & Drafting | 4+ Years Managing 1M+ Legal Documents | Serial Founder & Legal AI Author

Jurisdiction

England and Wales

Publisher

Genie AI

Document Type

Loan Agreement

Sector

Banking

Cost

Free to use
Relevant legal definitions


















































Clauses



































Industries

Companies Act 2006: Primary legislation governing company operations, including share capital, allotment of shares, directors' duties and powers, registration of charges, and company constitutional requirements

Financial Services and Markets Act 2000 (FSMA): Regulates financial services and markets, covering financial promotion restrictions, regulated activities provisions, and prospectus requirements

Corporate Insolvency and Governance Act 2020: Legislation governing corporate insolvency, including impact on lending arrangements and insolvency considerations

Consumer Credit Act 1974: Regulates consumer credit agreements and provides protection for transactions where lender or borrower could be classified as consumers

FSMA (Regulated Activities) Order 2001: Statutory instrument defining regulated activities and determining whether convertible notes constitute regulated activities

Companies (Model Articles) Regulations 2008: Provides standard articles of association and governs interface with company's constitutional documents

Financial Collateral Arrangements (No.2) Regulations 2003: Governs security arrangements and financial collateral in lending transactions

Common Law Principles: Fundamental contract law principles, equity, and relevant case law relating to convertible instruments

Money Laundering Regulations 2017: Anti-money laundering requirements including due diligence and reporting obligations

UK Listing Rules and AIM Rules: Regulations for listed companies and those planning to list, including disclosure requirements

EU Retained Law: Relevant European Union laws retained in UK legislation post-Brexit that impact convertible loan arrangements

Teams

Employer, Employee, Start Date, Job Title, Department, Location, Probationary Period, Notice Period, Salary, Overtime, Vacation Pay, Statutory Holidays, Benefits, Bonus, Expenses, Working Hours, Rest Breaks,  Leaves of Absence, Confidentiality, Intellectual Property, Non-Solicitation, Non-Competition, Code of Conduct, Termination,  Severance Pay, Governing Law, Entire Agreemen

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