Comparison · Startup Finance · 2026
Convertible Loan Note vs Equity Investment UK 2026: Funding a Startup
A convertible loan note is a loan that turns into shares later, deferring the tricky question of what the company is worth today. A straight equity investment fixes a valuation now and issues shares immediately. Here is how founders and investors should think about the two for 2026.
TL;DR - 30-Second Summary
- - Convertible loan note: loan now, shares later at the next priced round, usually with a discount and/or valuation cap
- - Equity investment: valuation agreed now, shares issued immediately, full shareholder rights from day one
- - Tax caveat: SEIS/EIS relief only applies once a note actually converts into qualifying shares, not while it remains a loan
Side by Side: Convertible Loan Note vs Equity Investment
| Feature | Convertible Loan Note | Equity Investment |
|---|---|---|
| When is valuation set | Deferred to next priced round | Agreed immediately |
| Investor status until conversion | Creditor (loan holder) | Shareholder from day one |
| Speed and legal cost | Quicker and cheaper to document | More documentation and negotiation |
| SEIS/EIS eligibility | Not until and unless it converts into qualifying shares | Available immediately if shares qualify |
| Investor protection mechanism | Discount and/or valuation cap | Negotiated share price and rights |
| If no further round happens | Depends on longstop/default terms | Not applicable — already holds shares |
What Is a Convertible Loan Note?
A convertible loan note is short-term debt issued by a company that is designed to convert into equity, typically at the company's next priced funding round, rather than being repaid in cash. To reward the investor for taking risk before the company's value is properly established, notes commonly include a discount to the future share price (often 10-25%) and/or a valuation cap that limits how expensive the conversion price can become, regardless of how well the company performs before the next round.
What Is a Straight Equity Investment?
A straight equity investment (or priced round) means the company and investor negotiate and agree a valuation for the business today, and the investor receives newly issued shares at that price in exchange for their cash. The investor becomes a shareholder immediately, with voting rights, information rights, and a defined percentage stake, set out in a shareholders' agreement and updated articles of association.
Who Should Choose What?
Convertible loan note suits...
- - Very early-stage companies with no track record to value
- - Founders wanting to raise quickly and cheaply
- - Bridge funding between two priced rounds
- - Investors comfortable deferring shareholder rights briefly
Equity investment suits...
- - Companies with enough traction to support a valuation
- - Investors who want immediate shareholder rights
- - Rounds where SEIS/EIS relief is a priority from day one
- - Situations where both sides can agree a fair price now
Frequently Asked Questions
What is a convertible loan note?
A convertible loan note (CLN) is a loan made to a company that converts into shares at a later date, typically at the next priced funding round, rather than being repaid in cash. It usually includes a discount (a percentage reduction on the price paid by new investors in that later round) and sometimes a valuation cap, both designed to reward the earlier, riskier investment.
What is a straight equity investment?
A straight equity investment (a priced round) means the investor and company agree a company valuation now, and the investor receives shares immediately in exchange for their cash at that agreed price. There is no conversion event and no discount mechanism — the investor is a shareholder from day one.
Why do early-stage startups often use convertible loan notes instead of a priced round?
Very early-stage companies are hard to value accurately — agreeing a valuation with a first investor can be contentious and time-consuming. A convertible loan note defers that valuation discussion to a later round when there is more evidence (revenue, users, traction) to base a price on, while still letting the company raise money quickly and cheaply in legal terms.
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What is a valuation cap on a convertible loan note?
A valuation cap sets a maximum company valuation at which the loan will convert into shares, regardless of the valuation agreed in the priced round. If the company's valuation rises quickly, the cap protects early investors by guaranteeing they convert at the lower, capped price rather than the higher live-round price, giving them a larger shareholding for the same investment.
Does a convertible loan note holder have shareholder rights before conversion?
No. Until conversion, a CLN holder is a creditor of the company, not a shareholder, so they generally do not have voting rights, dividend rights, or the other protections that come with holding shares. This changes once the note converts into equity at the triggering event.
What happens to a convertible loan note if the company never raises another round?
The terms of the note set out what happens — commonly the note converts at a longstop date using a pre-agreed valuation, is repaid with accrued interest, or converts on the company's sale or winding up. Founders and investors should check the maturity date and default conversion terms carefully before signing.
Does SEIS or EIS tax relief apply to convertible loan notes?
No — SEIS and EIS relief only apply to new ordinary shares issued directly for cash, not to loan instruments. This means investors using a convertible loan note give up SEIS/EIS income tax relief until and unless the note actually converts into qualifying shares, and even then, strict rules govern whether the resulting shares still qualify.
Which route is simpler and cheaper to set up legally?
A convertible loan note is usually quicker and cheaper to document than a full priced equity round, because it avoids the need for a formal valuation, a full shareholders' agreement, and updated articles of association at the time of investment — much of that detail is dealt with later, when conversion actually happens.
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Disclaimer: Figures shown are typical market ranges for 2026 and are for general information only, not legal or tax advice. Terms of convertible loan notes vary widely between deals. For personalised guidance, consult a startup solicitor and tax adviser before agreeing terms.
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