ASA vs Convertible Loan Note: Only One Keeps SEIS Alive
By SuLe · Updated 12 August 2026
Reviewed by Patricia Wing, corporate lawyer and founder of SuLe
Both convert into shares at your next round, but an ASA is an advance payment for shares - non-refundable, interest-free - while a convertible loan note (CLN) is debt: repayable, usually interest-bearing, with a maturity date. The practical consequence: a properly drafted ASA can qualify for SEIS/EIS; debt never can, so most UK angel money comes in as ASAs.
Key facts
- An ASA payment is irrevocable, non-refundable and interest-free - an advance payment for shares, not debt.
- A convertible loan note is debt: repayable, usually interest-bearing, with a maturity date.
- Debt can never qualify for SEIS (50% relief) or EIS (30%) - only shares can.
- Convertible notes commonly accrue interest around 5–10%, often rolled up rather than paid in cash.
- HMRC expects an ASA to convert within six months of signing; a note's maturity date is freely negotiated.
What is the legal difference between an ASA and a convertible loan note?
An ASA is an advance payment for shares; a convertible loan note is a loan that may become shares. One is equity risk from day one, the other is debt until the moment it converts.
Under an ASA the money is irrevocable and non-refundable, earns no interest, and the agreement cannot be varied, cancelled or assigned - the investor's only way out is shares. A CLN is the opposite: repayable, usually interest-bearing (commonly 5–10%, often rolled up rather than paid in cash), with a maturity date by which it must convert, be repaid or be renegotiated.
That legal difference drives everything else - the tax treatment, the insolvency position and the negotiation.
| ASA | Convertible loan note | |
|---|---|---|
| Legal nature | Advance payment for shares - not debt | Debt |
| Repayable | No - irrevocable and non-refundable | Yes - at maturity, if it hasn't converted |
| Interest | None | Commonly 5–10%, often rolled up |
| Converts | Next qualifying round, or at the longstop (≤6 months for SEIS/EIS) | Next round, maturity or another agreed trigger |
| SEIS/EIS | Yes, if HMRC's conditions are met | No - debt never qualifies |
| If the company fails | Money is lost - it was equity risk | Ranks as a creditor, ahead of all shareholders |
Why does SEIS or EIS usually settle the choice?
Because debt can never qualify for SEIS or EIS, and those reliefs - 50% and 30% of the amount invested respectively - are usually the angel's price for taking early risk.
The schemes require money genuinely at risk as equity, so a loan note fails by definition, however convertible it is. If the note later converts, relief can at best run only from the conversion share issue - and only if the scheme conditions are met at that point. The months the money spent as a loan earn nothing.
A properly drafted ASA keeps the money at risk from day one. HMRC's advance assurance guidance sets the shape: non-refundable, interest-free, incapable of variation, converting only into full-risk ordinary shares, with a longstop no more than six months out.
When is a convertible loan note the better instrument?
When your investor cannot claim the reliefs anyway - the schemes are aimed at individual investors, so funds and corporates are generally outside them - and wants downside protection instead.
Debt gives an investor two things equity never does: a right to repayment at maturity, and a creditor's place in the queue, ahead of every shareholder, if the company fails. For an investor with no SEIS or EIS to protect, that trade can beat a discount on hypothetical future shares.
Notes also appear in bridge financings between priced rounds. An institutional investor lending into a company it already backs has no relief to lose - the SEIS question simply doesn't arise.
What terms matter most in each instrument?
In an ASA: the discount, the fallback valuation, the qualifying-round definition and the longstop. In a note: the interest, the maturity date, the conversion triggers and any cap or discount.
ASA discounts typically sit at 10–20% on the next round's share price. The qualifying round is usually defined as a raise above a stated minimum - commonly somewhere in the £250,000–£1m range - so a small top-up cannot trigger conversion, and the longstop should stay within HMRC's six-month expectation where SEIS or EIS matters. Set the fallback valuation with care: it prices the conversion if your round slips.
For a note, pin down what happens at maturity - automatic conversion, repayment on demand, or renegotiation - and whether interest converts or is paid in cash. A cap and a discount can coexist; the investor typically converts at whichever gives the lower price.
Worked example
Kwame, founder of a warehouse-robotics startup, is offered £150,000 by an angel who suggests "a convertible note, like my last deal" - 8% interest rolled up, 24-month maturity. His solicitor reruns it as an ASA: same £150,000, 15% discount, six-month longstop.
The seed round closes five months later at £1.00 per share. Under the note, £5,000 of rolled-up interest (£150,000 × 8% × 5/12) would have converted too - 182,353 shares at the £0.85 discounted price. The ASA converts into 176,471 shares. The difference is about 5,900 shares; the difference in tax is £75,000 of SEIS relief (50% of £150,000) that only the ASA preserves. The angel signs the ASA.
Where founders go wrong
Bolting a refund clause onto an ASA
- a right to get the money back makes it debt in substance, and debt never qualifies for SEIS or EIS.Converting only the principal in the dilution model
- rolled-up interest converts too; your cap table is wrong without it.Letting the maturity date arrive without a plan
- an unconverted note is repayable debt; know whether you will extend, convert or repay well before the date.Assuming conversion rescues the tax relief
- money lent as a note earns no relief for the loan period; at best, relief starts from the conversion share issue, and only if the scheme conditions are met then.
Related questions
Is an ASA a loan?
No - and that is the whole point. The payment is irrevocable, non-refundable and interest-free, so it is an advance payment for shares rather than debt. A convertible loan note is the opposite: a real loan that happens to be convertible into shares. [More: What is an advance subscription agreement (ASA)?]
Do convertible loan notes qualify for SEIS or EIS?
No. Both schemes require the money to be at risk as equity, and a loan note is debt. If the note later converts, relief can only ever run from the conversion share issue - and only if the scheme conditions are met at that point. [More: Do ASAs and convertible notes qualify for SEIS/EIS?]
What interest rate do convertible notes carry?
UK convertible notes commonly accrue interest at around 5–10%, and it is often rolled up - added to the amount that converts - rather than paid in cash. Rolled-up interest quietly increases the shares issued at conversion, so include it in your dilution modelling.
Can one round mix ASAs and convertible notes?
Legally, yes - different investors can come in on different instruments. Practically it complicates the cap table and the next round: different conversion triggers, discounts and interest all land at once. If you do mix them, keep the conversion mechanics aligned and model the combined dilution.
How do a discount and a valuation cap interact in a note?
Where a convertible has both, the investor typically converts at whichever of the two produces the lower price per share - they don't stack. The discount rewards early risk in a modest round; the cap takes over if the round prices high. [More: How do a discount and a valuation cap work together in a convertible?]
The ASA-versus-note decision looks technical, but it moves real money: your investors' tax relief, your dilution and what happens if the round slips. A SuLe solicitor can pressure-test the instrument - and its terms - before anyone signs. Book a free term sheet review and get the structure right first time.
Keep reading: What is an advance subscription agreement (ASA)? · ASA vs SAFE - which should UK startups use? · What is a valuation cap and how does it work? · What is a priced round vs a convertible round? · Why do ASAs have a six-month longstop date? · Do ASAs and convertible notes qualify for SEIS/EIS?
Primary sources: HMRC - Seed Enterprise Investment Scheme · HMRC - advance assurance for venture capital schemes
