Convertible Notes vs ASAs
Which Structure for Your UK Seed Round?
Most UK founders raising angel investment should use an Advance Subscription Agreement, not a US-style convertible note. Here's the difference, why it matters for SEIS/EIS, and the terms you'll need to negotiate.
What Is a Convertible Note?
A convertible note is a short-term loan that converts into equity at a future funding round. The investor lends you money today, and instead of being repaid in cash, the loan converts to shares when you raise a priced round — typically at a discount to the round price and/or subject to a valuation cap.
Convertible notes originated in the US (where Y Combinator's SAFE note is the standard). They are clean, cheap to issue, and defer valuation negotiations. In the US context, they work well. In the UK, however, they have a significant problem: they are incompatible with SEIS/EIS relief in their standard form, because HMRC requires shares to be issued at the time of investment.
What Is an Advance Subscription Agreement (ASA)?
An ASA is the UK equivalent — and in many ways superior version — of a convertible note. The investor pays money now for the right to receive shares in the future at a preferential price. Crucially, unlike a convertible note, an ASA is structured as an equity instrument from the outset, not a loan.
HMRC has explicitly confirmed that correctly structured ASAs can qualify for SEIS and EIS relief, making them the default instrument for UK angel rounds. The investor claims their SEIS/EIS relief on the date they pay — not on the date shares are formally issued. The ASA must include specific provisions (no repayment rights, no security, correct long-stop structure) to preserve this qualification.
ASA vs Convertible Note: Side-by-Side Comparison
| Aspect | Convertible Note | ASA |
|---|---|---|
| Legal instrument | Loan agreement (debt) | Subscription agreement (equity) |
| Balance sheet treatment | Appears as liability | Typically treated as equity |
| SEIS/EIS qualifying | Not directly — shares must be issued at investment date for SEIS/EIS | Yes — HMRC designed ASAs specifically to be SEIS/EIS compatible |
| Interest | Yes — typically 5–8% p.a. | No interest — purely equity-based |
| Common in UK? | Less common at pre-seed (US origin) | Standard for UK seed rounds with SEIS/EIS angels |
| Valuation cap | Yes | Yes |
| Discount rate | Yes | Yes |
| Long-stop date | Yes (repayment risk) | Yes (conversion obligation) |
| Insolvency treatment | Ranks as debt — investor may be creditor | Ranks as equity — last in insolvency queue |
Key Terms You Need to Negotiate
Valuation Cap
The maximum pre-money valuation at which the convertible instrument converts to equity. Protects investors from converting at too high a price if the company raises at a very high Series A valuation.
Example: A £500K ASA with a £3M cap converts at max 12.5% equity — even if the Series A is at £10M.
Discount Rate
The percentage discount from the priced round at which the convertible converts. Rewards early investors for taking more risk.
Example: A 20% discount means if the Series A is at £1.00/share, the ASA converts at £0.80/share.
Interest Rate
Applies to convertible notes (loans), not ASAs. Accrues on the principal and either converts to equity or must be repaid. Typically 5–8% per annum for UK seed notes.
Example: £100K note at 6% interest over 18 months = £109K converting to equity at trigger event.
Long-Stop Date
The date by which a conversion trigger (qualifying round) must happen. If it doesn't, the investor can typically demand repayment or convert at an agreed price.
Example: A long-stop of 24 months gives you 2 years to raise your priced round before the note matures.
Qualifying Financing Threshold
The minimum amount that must be raised in the next round to trigger automatic conversion. Below this threshold, conversion may be optional.
Example: A £500K threshold means the ASA converts automatically only if you raise at least £500K in the next round.
MFN (Most Favoured Nation)
A clause allowing convertible note holders to adopt the terms of any better-priced future notes. Protects early investors if you do multiple note rounds.
Example: If you issue a second note with a lower cap, MFN holders can elect to adopt the lower cap too.
Typical UK Seed Round Terms (2026)
Benchmarks from UK angel rounds using ASAs. Use these as a starting point for your negotiations.
| Term | Typical UK range |
|---|---|
| Investment amount | £25K – £250K per angel (SEIS limit) |
| Valuation cap | £1.5M – £4M for pre-seed; £4M – £10M for seed |
| Discount rate | 15% – 25% (20% is most common) |
| Long-stop date | 18 – 24 months |
| Qualifying financing threshold | £300K – £750K |
| Interest (notes only) | 5% – 8% per annum |
| Legal costs | £1,500 – £5,000 per instrument |
When to Use Each Structure
Use an ASA when:
- ✓You're raising from UK angels who want to claim SEIS or EIS relief
- ✓You want to defer valuation but need to close investment quickly
- ✓You expect to raise a priced round within 12–24 months
- ✓Your investors are sophisticated UK angels familiar with the instrument
A convertible note may be appropriate when:
- —Investors are US-based and unfamiliar with UK ASA structure
- —No SEIS/EIS relief is being claimed (e.g. large institutional investors, offshore funds)
- —You need bridge financing from existing shareholders who already own equity
Frequently asked questions
What is an Advance Subscription Agreement (ASA)?
An ASA is a UK-specific investment instrument where an investor pays money now in exchange for a right to receive shares in the future — specifically at the next priced funding round, at a discount or capped price. The key difference from a convertible note is that the ASA is an equity instrument from the outset (not a loan), which means it can be structured to be SEIS/EIS qualifying. HMRC published specific guidance on how ASAs can be structured to preserve SEIS/EIS relief, making them the standard instrument for UK angel seed rounds.
Why are ASAs preferred over convertible notes for SEIS/EIS purposes?
SEIS and EIS require that shares be issued to the investor at the time of investment. A convertible note is a loan that converts to shares later — which means at the point of investment, no shares exist, and SEIS/EIS relief cannot be claimed. An ASA can be structured so that the investor is treated as having subscribed for shares immediately (with the share issuance deferred), allowing HMRC to agree that SEIS/EIS relief applies from the date of the investment. This is why virtually all UK angel rounds using SEIS/EIS use ASAs rather than US-style convertible notes.
What happens if I hit the long-stop date without raising a qualifying round?
The long-stop date triggers the ASA's fallback provisions. Typical options include: the investment automatically converts to equity at the valuation cap (regardless of whether a qualified round has happened), the investor has the right to demand a conversion at a pre-agreed price, or — less commonly — the company must repay the investment (rare in ASAs, more common in convertible notes). Always negotiate clear long-stop provisions. A 24-month long-stop gives you time to raise; a 12-month long-stop creates pressure.
Can I raise via ASA without setting a valuation?
Yes — that is one of the primary reasons founders use ASAs. Instead of agreeing a valuation now, you agree a cap (maximum future valuation) and a discount (reward for early risk). The actual conversion price is determined at your next priced round. This is useful when you have traction but don't want to anchor your valuation too early, or when different angels have different views on value and you want to avoid a protracted negotiation.
Should I use the same ASA terms for all angels in my seed round?
Ideally yes. Using different terms for different investors in the same round creates complexity and potential disputes. If you need to adjust for different investor sizes, you can vary the investment amount while keeping the cap, discount, and long-stop consistent. Be aware of MFN clauses — if you've issued a previous ASA and then issue a new one on better terms, MFN holders can elect to adopt the improved terms.
Do I need a lawyer to issue an ASA?
Yes — though it's not as expensive as a full equity round. Many UK startup law firms offer fixed-fee ASA templates for £1,500–£3,000. Outfits like Seedlegals, Vestd, and Stephenson Harwood have standardised ASA documents. If you're raising from sophisticated SEIS/EIS angels, they will expect a properly drafted document. Never use a US convertible note template for a UK raise — the legal and tax treatment is different.
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