14 October 2022


This article provides an overview of advance subscription agreements and convertible loan notes, as an alternative to other forms of equity fundraising. 

These are both up-front funding options that provide the company with an immediate cash injection in exchange for future shares. Both options provide a quick and early financial boost to get the business off of the ground as a form of short term ‘bridge finance’ in contemplation of a future equity funding round.

Their rising popularity in the UK is partially due to the effects of the COVID-19 pandemic, which made the securing of satisfactory equity financing terms difficult. Therefore, temporary funding methods such as these have become widespread in order to propel or sustain start-ups until their next equity round without the immediate need to value their companies or negotiate long form equity investment documents

Each has significant differences that bear consideration in picking the most appropriate funding method. It is important to note that these differences will have an impact on investor preference, either because they are more comfortable with one structure or because of the investor’s individual circumstances (including, most importantly, their tax position).

Advance Subscription Agreement

Advance Subscription Agreements (ASAs) are a 100% equity investment, requiring an upfront payment to a company in return for the right to be issued shares in the company at a later date (usually at a discount to the price per share payable by other investors at the next funding round). The company will be valued and shares issued at the next equity funding round. If there is no fundraising round, the shares will usually convert on a longstop date at an agreed price, calculated with reference to a cap on the value of the company.

As the amount payable by the investor under the ASA is technically pre-payment as opposed to a debt, it does not generate interest and cannot become repayable in cash. This is advantageous for the companies, who do not then have to pay interest on any funds received or repay any of these funds.

Advantages for investors include eligibility for tax advantages under the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Schemes (SEIS), again appealing to start-ups. To comply with the strict requirements under the EIS and SEIS schemes, a longstop date of no more than six months from the date of the ASA must be included.

Convertible Loan Notes

Convertible Loan Notes (CLNs) are a type of debt instrument, allowing holders to earn fixed interest alongside receiving back their principal investment. The idea is that the CLN’s will convert at the valuation achieved at the next qualifying funding round (or a discount to that valuation).

If the company does not achieve a ‘qualifying’ funding round prior to the maturity date of the notes or if there is otherwise an event of default or sale of the company, the CLNs along with any accrued interest will become repayable.

Pros and Cons


Unlike straight equity investments, where negotiation and drafting of multiple long form documents is required, both of these methods are uncomplicated and fast, with the capacity to rapidly generate finance for the company. This cuts out a great deal of initial expense, which is well-suited to start-ups.

Additionally, valuation of the company does not usually occur until the first formal funding round, simplifying the process and potentially preventing too much equity being released on the basis of an inaccurate valuation.


Immediate negotiation is sometimes required; for example, in cases where an investor requires a valuation cap on the company, or if shares are to be issued automatically on a long-stop date. This takes away the advantage of funding speed whilst also effectively resulting in a quasi-valuation of the company.

Valuation caps can have negative consequences. Investors under future funding rounds can be deterred by the fact that ASA investors and CLN holders are entitled to deeply discounted shares. These discounted shares may make up a large proportion of the new shares to be issued, depressing the amount of new money resulting from qualified financing. This in turn drives down actual valuation in future rounds as new investors may not want to invest at significantly higher prices than the discounted shares.

An absence of a valuation cap can also lead to unwanted consequences. Should the valuation on qualified financing be higher than anticipated, this would likely lead to the need to reduce this valuation in order to retain the ASA/CLN target percentages. This in turn would likely generate discontent owing to the dilution of existing shareholdings; managing these relationships within the company can become problematic.

Whilst avoiding the need for immediate decision-making can be advantageous, there is potential for ambiguity and renegotiation.

CLNs and ASAs: key differences


Convertible loan note

Advance subscription agreement


Debt instruments


Therefore note holders rank ahead of shareholders on liquidation.

Equity investments


Therefore riskier for investors.

Length of agreement

They are usually longer agreements therefore require more negotiation.

They are usually shorter agreements therefore require less negotiation

Is the money invested repayable?

The money is repayable providing it has not been converted.

The money is not repayable.


Yes; option to be repaid in cash

No; will always result in issue of shares

Interest bearing



EIS/SEIS relief



Provided the strict requirements are met including:

  • inserting a longstop date;
  • no loan element;
  • no downside investor protection; and
  • no variation.

This article was written by Victoria McCarron. Please contact Alex Lloyd or Niall Mackle at Burges Salmon if you would like to discuss advance subscription agreements or convertible loan notes in more detail.

Key contact


Alex Lloyd Partner

  • Mergers and Acquisitions
  • Private Equity
  • Venture Capital

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