The Convertible Note (or Loan), the Advance Subscription Agreement’s older brother, allows startups to take in early investment without committing to a valuation by accepting investment in the form of debt (as a note) that will then convert to equity at a future funding round. This is the main difference between Advance Subscription Agreements and Convertible Notes, one is an agreement for future equity, one acts like debt on the balance sheet and then converts to equity - this means you can pay the money back before the conversion date and then they won't convert to equity.
The debt nature of Convertible Notes actually has a few disadvantages for the startup:
- They often have an interest rate for the loan (typically 2 - 8 %) and a discount rate, meaning the longer you take to complete your funding round, the more you pay back in interest;
- If the company fails before the funding round, the investors show up as a liability on the balance sheet and will still need to be paid back first;
- The investors are SEIS/EIS ineligible, because they are investing using a debt vehicle and HMRC see this as de-risking the investment.
The SeedFAST (ASA) fulfills the same purpose as the Convertible Note, however, they are fit to use in the UK and compatible with the UK SEIS/EIS tax schemes. The SeedFAST satisfies the companies need for urgency and the investors need for tax relief! They also carry no interest rate, only a discount, and you are not liable to pay the investor back first on liquidation, investors are treated like normal equity holders.