A convertible loan note gives a company funding now, with debt that may convert into shares under agreed conditions. Your eventual dilution depends on the amount converting, the conversion price and all shares issued in the round. Interest, maturity and repayment terms matter if the next raise is delayed. A SAFE is a different contractual instrument: compare the actual documents, then model ownership and cash before signing.
“We will agree the valuation later” can sound as though the ownership decision has been postponed. A valuation cap and discount can already determine much of the result.
I want the finance work to help you make a decision: take the funding now, wait, or change the terms. For a note, that means seeing what happens to ownership and cash if the round closes as planned, closes late at a different price, or never closes. A model that answers only the first question is not enough to sign on.
Stock photograph: 2H Media on Unsplash.
What is a convertible loan note?
A convertible loan note, often shortened to CLN, records a loan with a mechanism for conversion into shares. It can help bridge the period before a priced equity round, when investors subscribe for shares at an agreed price.
The documents determine whether conversion is automatic or optional, what triggers it, what interest does and when repayment can be required. Do not assume every note follows the same timetable or investor rights.
For the wider choice between customer funding, grants, loans and investment, start with our Irish startup funding guide.
When does a note solve the right problem?
A note can make sense when it finances a defined step before a priced round: finishing a product stage, proving paid demand or reaching another milestone investors can assess. The business case should explain what changes before the next raise and why that progress justifies the cash and dilution risk.
Also compare taking the money now with waiting until the next milestone. Waiting only helps if the company can afford to reach that point and has a credible reason to expect different terms. Put both routes through the same cash and ownership model.
If founder and investor can agree the valuation now, compare a direct share subscription too. Issuing shares fixes that transaction's ownership at closing; a note leaves a conversion calculation and potentially a repayment obligation to manage. Later rounds can dilute either structure.
If the note simply funds a continuing cash deficit and the plan has no credible route to conversion or repayment, the company has gained time without resolving the underlying problem. Challenge that before negotiating the headline interest rate.
Read the terms as one calculation
A low interest rate does not necessarily make a note inexpensive. A lower conversion price means more shares for the investor. A repayment deadline may matter more than either if the company cannot close its next round.
| Term | What to establish | Why it changes the decision |
|---|---|---|
| Principal and interest | Amount invested, rate, simple or compound basis, and whether interest converts | Sets the amount that must convert or be paid |
| Conversion event | The event and any minimum new-money threshold | A small follow-on raise may not trigger conversion |
| Discount | How the next-round share price is reduced | A cheaper price produces more shares for the same investment |
| Valuation cap | Pre-money or post-money basis and the precise capitalisation definition | The same headline cap can produce different ownership |
| Maturity and default | Repayment, conversion or extension rights and who controls them | Establishes the cash exposure if fundraising slips |
| Exit and other rights | Sale proceeds, priority, consents and any side letters | Share percentage alone does not describe the whole deal |
Use the signed definitions in the model. In particular, establish whether the capitalisation used for the cap includes options, unallocated option pools or other convertible instruments. A spreadsheet assumption cannot override the contract.
Worked example: from €100,000 invested to 10.71% ownership
This is a fictional negotiated note, not a PSSF calculation or a Y Combinator SAFE. The figures are teaching assumptions, not Irish market benchmarks.
Assume:
- €100,000 principal and 4% simple annual interest for exactly two years.
- Both principal and interest convert.
- A new-round subscription price of €10 per share and a 20% discount for the note.
- A €600,000 pre-money valuation cap, divided by an agreed capitalisation base of 100,000 founder shares, excluding the note.
- The contract uses the lower of the cap price and discounted price.
- A new investor subscribes €500,000 at €10 per share.
- No other instruments, options, pool increase, transaction costs or differing economic rights enter this illustration.
First calculate the amount converting and the price:
| Step | Calculation | Result |
|---|---|---|
| Interest | €100,000 × 4% × 2 years | €8,000 |
| Amount converting | €100,000 + €8,000 | €108,000 |
| Discount price | €10 × 80% | €8 per share |
| Cap price | €600,000 ÷ 100,000 shares | €6 per share |
| Applicable price | Lower of €8 and €6 | €6 per share |
| Shares issued on conversion | €108,000 ÷ €6 | 18,000 |
| Shares issued for new cash | €500,000 ÷ €10 | 50,000 |
The cap gives the note holder the lower price, so it controls this example. Next, calculate ownership using all 168,000 shares after the round.
| Holder | Shares after the round | Ownership |
|---|---|---|
| Founders | 100,000 | 59.52% |
| Note holder | 18,000 | 10.71% |
| New investor | 50,000 | 29.76% |
| Total | 168,000 | 100% before rounding |
The displayed individual percentages total 99.99% because of rounding.
Three shortcuts would give the wrong answer. Dividing €100,000 by the cap ignores converting interest and the full share calculation. Looking at the note holder's percentage before the new investment ignores subsequent dilution. Treating the discount as an ownership percentage confuses price with shares.
A 20% discount produces 25% more shares at that price
If only the discount applied, €108,000 would buy 13,500 shares at €8, compared with 10,800 at €10. That is 25% more shares for the same amount, because 1 divided by 0.8 is 1.25.
It does not mean the investor receives 20% or 25% of the company. Their percentage depends on the final share total. In our main example, the cap produces 18,000 shares instead.
What if the new round closes at a lower share price?
Keep the two-year conversion amount, cap definition and €500,000 new investment unchanged, but reduce the new-round price to €5 per share. The discounted price becomes €4, below the €6 cap price, so the discount now controls.
The note converts into 27,000 shares (€108,000 divided by €4). The new investor receives 100,000 shares. With the founders' original 100,000, the total is 227,000. The founders retain 44.05% (rounded), compared with 59.52% in the €10 scenario.
The lower price increases the shares issued for both the note and the new cash. Checking only the note's discount would miss a substantial part of the founders' dilution.
Test the delayed-round case before accepting the note
Your fundraising target and operational cash plan need separate assumptions. A founder can work towards a round closing in June while testing what happens if cash is still missing in September.
Under the example's simple-interest terms, an agreed one-year extension at the same rate would increase the amount converting from €108,000 to €112,000. That extension requires whatever consents the documents specify; it is not the founder's unilateral choice.
For illustration, if €112,000 became repayable and the company had only €40,000 available, the repayment gap would be €72,000 before allowing for payroll and other commitments. Calling the instrument “convertible” would not supply the missing cash.
Put the maturity date, notice periods, cash requirements and decision owner into your forecast. Establish when you must seek an extension, alternative finance or a change in spending. Begin before the company reaches the point where it cannot meet an obligation.
Our cash-flow forecasting guide covers the operating timetable. The instrument model must feed into it.
How does a SAFE compare?
SAFE stands for Simple Agreement for Future Equity. Y Combinator's published forms provide a useful reference, but an Irish company must assess the actual form and its local legal and tax implications.
| Question | Convertible loan note | Standard YC SAFE reference |
|---|---|---|
| Does interest accrue? | As the note provides | No interest |
| Is there a maturity date? | Usually specified; inspect the consequences | No maturity date |
| How is conversion priced? | Agreed formula, which may include a cap and/or discount | Different forms use different mechanisms |
| What if there is no round? | Apply the contractual repayment, conversion or extension terms | May remain outstanding; exit and dissolution provisions still matter |
| Is it immediately issued share capital? | A note does not become shares until conversion | The SAFE gives contractual rights before conversion |
YC offers separate cap-only, discount-only and uncapped MFN forms. Do not assume every SAFE combines a cap and a discount. Nor should you use our pre-money note calculation unchanged for a post-money SAFE: the capitalisation definitions and treatment of other instruments differ.
YC's listed international forms do not include Ireland. Use an Irish solicitor to assess the proposed document and company approvals. A familiar US form does not settle Irish company law or investor tax relief.
Keep the cap table and accounting assessment separate
A cap table shows ownership and potential dilution. The accounts assess the financial instrument under the company's applicable reporting framework. The same document needs both reviews.
Under FRS 102, section 22, classification considers the contractual substance, including relevant settlement obligations. Variable-share settlement and some contingent cash obligations can matter. “No interest and no maturity date” is not enough to conclude that every SAFE is accounting equity.
Give the accountant the executed agreement, side letters, receipts and amendments. Ask them to document classification and measurement under the applicable framework and version. Do not post the receipt to share capital merely because equity may be issued later.
Document the conclusion for the actual instrument; there is no universal journal entry for all Irish notes or SAFEs.
What to settle before signing
Ask your solicitor and accountant to work from the same document and scenario assumptions. You should be able to answer five questions:
- How much converts at the expected date, including interest where applicable?
- What do the cap and discount mean under the agreed definitions?
- What does ownership look like after all notes, new cash and any option-pool change?
- What must the company pay or renegotiate if the round is delayed or abandoned?
- Which corporate approvals, filings, accounting decisions and tax questions need action, and who owns them?
An option-pool top-up can dilute founders differently depending on how the transaction is priced. Model it from the agreed terms rather than adding an unexplained “10%” to an existing spreadsheet.
If you are still establishing the company, our Irish company formation guide covers the foundations. For Enterprise Ireland investment, use the dedicated programme guidance and the current offer documents; generic note examples do not replace PSSF terms. Our PSSF financial preparation guide works through the cash timetable and supporting evidence.
Connect the funding decision to monthly finance
After the investment, keep the instrument register, accounts and forecast aligned. Record interest, changes in terms, reporting dates and the next cash decision. Revisit the ownership model when a new instrument or round is proposed.
Around Finance provides accounting and finance support for technology companies, including agreed financial preparation and reporting work alongside legal advisers.
If your business is funded or preparing a credible raise and needs an ongoing finance relationship, book a Finance Fit Call.
FAQs
What is a convertible loan note?
A loan instrument that can convert into shares under agreed conditions. The documents specify conversion events, pricing, interest and any repayment or maturity provisions.
Does a 20% discount mean the investor owns 20%?
No. It reduces the relevant price per share by 20%. The investor's ownership depends on the shares issued to them and the total shares after conversion and the funding round.
Does interest always convert into shares?
No. The instrument determines whether interest converts, is paid or is treated another way. Check its accrual basis and the precise period used in the calculation.
Does a valuation cap fix the company's next-round valuation?
No. It sets a contractual limit within the conversion-price mechanism. New investors may negotiate a different valuation. The cap's effect depends on its definition and the other terms.
Is a SAFE always equity in the Irish accounts?
No. Classification depends on the agreement and the reporting framework. The accountant must assess its substantive rights and obligations; the name and lack of interest do not settle the answer.
What happens if the next funding round never closes?
Read the instrument's no-round, maturity and repayment provisions. A standard YC SAFE has no maturity date, while a note may create a repayment obligation or other rights. Model the cash consequences and take advice before obligations fall due.
