“Convertible notes are a bridge-use them to cross a chasm, not to camp on it.” – Matt Glynn

Convertible Loan Notes (CLNs) are one of the most common “bridge” instruments founders use to raise quickly without doing a full equity financing round. They’re fast, flexible, and can be founder-friendly-if you understand the triggers, maths, and local law. This station flags the essentials most teams overlook so you can deploy CLNs with confidence, not hope.

◼️Speed & Simplicity: Raise fast without pricing your company today.

◼️Defers Valuation: Use a cap/discount to price later when traction is clearer.

◼️Founder Control: No immediate board seats or heavy prefs (usually).

◼️Runway Extension: Bridges to a value inflexion point (product, revenue, Series A).

◼️Market Norms: Model templates exist (e.g., the Singapore Venture & Private Capital Association’s “Convertible Agreement Regarding Equity”),  easing negotiation.

◼️Local Nuance: Enforceability and mechanics vary by jurisdiction-especially in the UAE-so structuring matters.

◼️Investor Signalling: Shows momentum, though some funds prefer priced rounds.

◼️Downside Protection: Debt status until conversion (interest, maturity, seniority vs equity).

PAA: What is a Convertible Loan Note (CLN)?
A CLN is a debt instrument that converts into equity at the next funding round. Until then, it is legally debt.

PAA: What is a valuation cap in a CLN?
It’s the maximum pre-money valuation used for conversion, protecting early investors if the next round valuation is very high.

PAA: What is the discount rate in a CLN?
It’s a percentage reduction (e.g., 20%) applied to the conversion price, giving noteholders equity more cheaply than new investors.

PAA: Do CLNs give investors governance rights?
Normally no, unless negotiated. At most, they might include limited info rights.

Legal Implications

◼️Ambiguous conversion terms trigger disputes over price, timing, or qualification.

◼️Security gaps (or unintended discharge) can erase investor protections during restructures.

◼️Regulatory traps (dealer status, prospectus, local company law) can bite investors/issuers.

PAA: What happens if a CLN matures before conversion?
If no qualifying financing occurs, investors may demand repayment of principal plus interest, or negotiate for conversion into equity.

Founder Relationship Issues

◼️Misalignment between noteholders and shareholders when maturity looms without a round.

◼️MFN/cap stacking resentment across early investors if terms are inconsistent.

PAA: How much dilution do founders face from CLNs?
Dilution depends on the agreed valuation cap, discount rate, and accrued interest. Without careful modelling, founders can face more dilution than expected.

Commercial Implications

◼️Unexpected dilution from caps/discounts compounding with interest and MFN.

◼️Down-round optics if conversion math looks punitive at the next raise.

PAA: What are common risks for founders with CLNs?
Key risks include surprise dilution, having to repay debt if conversion doesn’t occur, and disputes about what counts as a “qualified financing.”

Operational Implications

◼️Covenant friction (info rights, negative pledges) slowing deals or partnerships.

◼️Execution drag from re-papering when moving jurisdictions (e.g., to ADGM/DIFC).

PAA: Do CLNs give investors governance rights?
Generally no - but some investors negotiate limited rights such as access to financial reports or consent rights on major decisions.

Biz Valuation Issues

◼️Valuation disputes at conversion (what metric, when measured, who decides).

PAA: Why do start-ups prefer CLNs over priced rounds?
Because CLNs delay valuation until a later funding round, letting start-ups raise quickly without locking in a potentially unfair early valuation.

The above lists are indicative issues – the relevance of which will depend on your circumstances…

1. Choose the right instrument (CLN vs SAFE).

2. Define clear conversion triggers.

3. Set the maths up-front.

4. Protect against “orphaned” notes with long-stop dates or discretionary conversion.

5. Lock governance & information rights at a limited but practical level.

6. Clarify security / subordination to align with future debt.

7. Plan for cross-border enforceability (ADGM/DIFC preferred in the UAE).

8. Anticipate regulatory overlays (prospectus, dealer registration, promotions).

9. Paper changes properly to preserve investor protections.

10. Keep your cap table clean by modelling conversion waterfalls.

11. Localise with model docs like the Singapore VIMA CLN.

12. Communicate expectations with a plain-English investor note showing worked examples.

PAA: How does a CLN differ from a SAFE agreement?
CLNs are debt until conversion, with interest and maturity. SAFEs are not debt-just a contract for future equity.

PAA: What is a Qualified Financing in a CLN?
A future funding round that meets a set threshold (e.g., $1m+) and automatically triggers conversion of the notes into equity.

PAA: How is interest calculated on a CLN?
 As set in the note-either simple or compounding. At conversion, accrued interest usually converts into equity along with the principal.

CLNs exist to buy you time, not to avoid hard decisions. Keep terms lean, maths unambiguous, and jurisdiction chosen for enforceability.

PAA: Are CLNs considered debt or equity?
They are debt instruments until they convert into equity at the agreed trigger.

Case Study 1 – Global/US (Regulatory Risk)

In Xeriant, Inc. v. Auctus Fund LLC (2025), the U.S. Court of Appeals considered whether a fund regularly investing through CLNs needed to register as a securities dealer. Regulators argued yes; the fund argued no. The court clarified that not all CLN investors are “dealers,” but the case showed how regulatory scrutiny can stall deals.

Lesson for founders: If your noteholder gets caught in regulatory disputes, your company can be dragged in. Always check that investors are properly structured to hold and convert notes.

Case Study 2 – Singapore (Restructuring Gone Wrong)

In [2021] SGHC 37, a start-up issued CLNs secured against assets. Later, the parties tried to restructure them into shareholder loans without properly addressing the existing security and maturity dates. When the company collapsed, the court found the restructuring had voided the security-investors lost their protection and ranked with ordinary creditors.

Lesson for founders: Don’t casually “re-paper” CLNs. Sloppy drafting can strip investors of rights, trigger disputes, and sour relationships with backers.

Case Study 3 – UAE/DIFC (Release Wipes the Slate Clean)

In Mufra v Mapart (2023), CLNs were discharged by a Deed of Release signed during settlement talks. The DIFC court enforced the release strictly: the investors lost all rights to convert or claim repayment.

Lesson for founders: A release deed can erase CLN rights completely. Be crystal clear in drafting: are you releasing past breaches, or the entire instrument? Precision in DIFC/ADGM is critical.

◼️Convertible Loan Note (CLN): Debt that converts into equity upon agreed triggers.

◼️Valuation Cap: Maximum valuation used for conversion.

◼️Discount Rate: % reduction applied to conversion price.

◼️Qualified Financing: Threshold funding round that triggers automatic conversion.

Watch out for the legal jargon and refer to the knowledge hub for plain-English explanations.

CLNs are powerful when tight on terms and honest on maths. The biggest founder mistakes are vague triggers, sloppy caps/discounts, and ignoring jurisdictional quirks. Keep it short, clear, and enforceable-and never restructure on the fly without a paper trail.

PAA: What are common risks for investors with CLNs?
Risks include company failure before conversion, unclear triggers leading to disputes, and restructurings that wipe out protections.

Q: Are Convertible Loan Notes enforceable in Singapore?
Yes, widely used and enforceable. Investors often expect the VIMA CLN template as a baseline.

Q: What is the VIMA CLN?
A standard form under the Venture Capital Investment Model Agreements initiative, saving time and cost.

Q: Do Singapore CLNs require regulatory approval?
Not usually, but the Companies Act and (if widely offered) Securities and Futures Act apply.

Q: How do courts treat CLN restructurings?
Poorly drafted restructures can void protections. A 2021 case highlighted this risk.

Q: Do CLNs attract stamp duty or tax?
Yes-stamp duty may apply to security, and interest is usually deductible to the company and taxable to investors.

Founder Tip: Always start with VIMA, model scenarios, and don’t re-paper without proper legal review.

Q: Can UAE companies issue CLNs?
Yes, but enforceability is limited outside ADGM/DIFC.

Q: Why are ADGM and DIFC preferred?
They follow English common law, giving CLNs global enforceability.

Q: Are CLNs treated as debt in the UAE?
Yes, until conversion they are debt.

Q: Can CLNs be secured under UAE law?
Yes, but filings differ by jurisdiction; most start-up CLNs are unsecured.

Q: Do CLNs raise Sharia issues?
Yes-interest may conflict with Sharia principles, another reason ADGM/DIFC are preferred.

Q: What happens if a CLN is restructured or released?
DIFC courts upheld release deeds that wiped CLN claims-so wording is critical.

Founder Tip: Use an ADGM/DIFC SPV to issue CLNs, and keep release drafting very tight.

◼️Market-standard CLN templates (Singapore VIMA, UK, ADGM/DIFC).

◼️SAFE vs CLN advisory with dilution modelling.

◼️UAE structuring (SPV setup, intercompany flows, security filings).

◼️Investor negotiations and governance calibration.

◼️Regulatory health-check (prospectus, dealer, exemptions).

◼️Cap-table hygiene and conversion waterfalls.

◼️Restructure and release drafting that preserves protections.

◼️Regional playbooks (SEA/UAE/India) to navigate local quirks.