When looking to raise investment, choosing the right legal structure is vital when considering your long-term plan.
The type of investment documents you choose can impact everything from future funding rounds to SEIS and EIS eligibility, not to mention your ownership structure.
Whilst it can be hard to navigate the sometimes overwhelming world of investment documents, truly understanding what your options are will help you get a better grasp of what’s right for you.
Advance subscription agreements (ASAs) and convertible loan notes (CLNs) are popular choices for both founders and investors alike, especially for early-stage businesses. Each also carries their own pros and cons, so first let’s take a look at the bigger picture.
There are two routes to go down when it comes to share structure and investment documents. The first utilises a more traditional share issuance structure, offering instant ownership in exchange for capital.
This route may involve more simple share subscription letters and agreements, or more complex structuring by way of investment agreements. Either way, the goal is to issue shares immediately.
ASAs and CLNs are used when the capital is provided upfront, in exchange for (in many cases) shares at a later date.
This is common when the share price cannot be determined at the point of investment, which is likely to be due to the business being at an early stage (or even zero value).
For an overview of the different routes available, take a look at our flowchart.
Both ASAs and CLNs are used by businesses to raise investment now without issuing shares immediately. This approach is useful if:
However, the mechanics behind ASAs and CLNs are quite different:
Equity instrument = “You will own a piece of the pie.”
Debt instrument = “I’ll pay you back.”
Let’s take a deeper look into each.
An ASA is a simple contract whereby investors provide capital to a business under the agreement that they will receive shares at a discounted rate in future in exchange for their investment.
ASAs and S/EIS compatibility
One of the main draws of ASAs for founders and investors is that it can allow for fundraising through the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
This is because the ASA is not a loan, does not accrue interest, nor does it function as a debt instrument, which would all render it ineligible for S/EIS.
However, it’s important to note that all investments through ASAs are not automatically eligible for such schemes.
The ASA must still be set up within HMRC guidelines, which also provides stipulations on the longstop date within which the ASA must convert into shares, currently set at 6 months.
This is due to the possibility that the qualifying criteria could change if the shares are issued long after the initial investment.
Whilst this is not a concrete cut-off, dates that exceed six months are unlikely to qualify. They state:
As a general rule, HMRC expects a longstop date to be no more than 6 months from the date the ASA is entered into. Where the longstop date provides for a period any longer than six months, HMRC is unlikely to be able to provide an advance assurance in view of the likelihood that any future conditions anticipated at the date of the ASA will not accurately reflect the true conditions at the time of the eventual share issue.
Why do investors like ASAs?
To summarise ASAs:
Convertible loan note (CLN)
A CLN is a loan given to a company by an investor, with the expectation that it will convert into shares at a qualifying round, or may be repaid in cash.
Similarly to ASAs, a CLN allows businesses to access investment without agreeing on a valuation or share price. However, a CLN is legally defined as a loan, and so binds the business to specific legal obligations that come with debt.
Generally speaking, the money invested will convert into shares at a qualifying round, whereby they will receive the shares they purchased previously (at a discounted rate), in addition to any interest accrued, that can also be added onto the shares issued.
However, a maturity date is set in the terms of the CLN, that sets a date whereby if no qualifying round has occurred, the investor can demand repayment (including interest), or even force conversion, depending on the terms set.
Why do investors like CLNs?
There are increased investor protections, as they can recover their money if the company doesn’t grow as hoped (rather than being left with worthless shares).
Their investment is more flexible, with the option of shares if the company grows.
Some investors value the interest that accrues whilst awaiting conversion (usually between 2-10%)
To summarise CLNs:
Debt implications (CLN)
Issuing a CLN means your startup takes on debt—this gives directors strict legal obligations under UK law.
If the company struggles financially, lenders (including investors under the CLN) have the right to any money not returned to them by a certain date.
Companies should tread carefully to ensure that they aren’t borrowing too much under a CLN, as this could render them technically insolvent if they are unable to pay the debt back.
S/EIS tax relief implications (ASA)
ASAs are beloved by investors because they unlock tax reliefs through either SEIS or EIS. However, the ASA needs to be structured correctly for this to be the case.
Any repayment terms, inappropriate longstop dates, or loan features written into the ASA will render the investment ineligible for S/EIS.
Set investor expectations appropriately
Investors may favour CLNs because they offer downside protections through the repayment option.
Others—particularly those seeking S/EIS tax relief—will only invest via an ASA or an alternative route with immediate share issuance.
Think about the type of investors you're targeting, what matters most to them, and how that aligns with your own goals and growth plans as a founder.
Choosing between an ASA, CLN, or even other routes that enable shares to be issued instantly, is all about balancing risk, speed, S/EIS, and your startup’s growth strategy.
InVestd Raise is our fully digital platform that gives you everything you need to manage your investment journey with confidence.
Access ready-to-use investment agreement templates tailored to your needs, issue shares at the click of a button, and instantly update shareholder records with seamless two-way Companies House integration — all in one place.
Book a call today to discuss raising through InVestd.