ASA vs convertible loan note — what's the difference?
By SuLe · Updated 7 June 2026
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
