Why loan note matters to a first-time founder
Loan notes can raise capital without issuing shares immediately, but they create debt and may include security, covenants or conversion rights. Founders should understand repayment priority and dilution scenarios. The instrument’s label alone does not reveal its economic or legal effect.
Examples of loan note
An investor advances ₦200 million to a company under loan notes paying 8% annual interest and maturing in two years. The terms allow conversion into shares during a qualifying funding round at an agreed discount, otherwise principal and accrued interest become repayable at maturity.
Common misunderstanding
A loan note is not necessarily convertible, transferable or secured. Those features must appear in its terms. Depending on structure and jurisdiction, notes may also be securities subject to offering, registration, disclosure or tax rules, even when issued to a small group.
When to use it
Use the term when documenting or discussing borrowing represented by notes. Review interest, maturity, repayment priority, security, conversion, transfer, default and amendment provisions. Model both cash repayment and any equity conversion, then obtain legal and tax advice for the relevant jurisdictions.