A A loan to a company that converts into shares at a later financing round, usually at a discount or subject to a valuation cap.More in glossary is fast to close, light on negotiation, and easy to explain to investors who are not ready to price a round. For founders under time pressure, those qualities are attractive. The problem is that convenience has a way of becoming habit, and habit is a poor substitute for judgment.
What a CLA Actually Offers
At its core, a CLA lets you raise capital today and defer the valuation conversation until your next equity round. The investor puts money in, and that money converts to equity later, typically at a discount or subject to a valuation cap agreed at the time of the note.
This deferral is the feature. It removes the need to agree on what the company is worth before that question has a clear answer. At pre-seed or pre-product stage, a valuation is often more fiction than fact. A CLA acknowledges that and moves past it.
The result is speed and simplicity. Fewer negotiation points, faster closes, and less distraction from the work of building. For a bridge between two larger raises, or for bringing existing investors along quickly, it is often the cleanest option available.
Where CLAs Create Problems
The same flexibility that makes CLAs attractive can create real complexity later, particularly when founders have not thought through the mechanics carefully.
Multiple notes stacking on the The record of who owns what in a company, including shares, options and instruments that may convert into shares.More in glossary can produce unexpected The reduction in an existing shareholder's percentage ownership when a company issues new shares.More in glossary at the conversion event. Founders sometimes discover, mid-Series A, that they have promised more of the company than they realised.
A simple example shows how quickly this happens. A founder with 1,000,000 shares raises CHF 500,000 on a note with a CHF 4 million cap, and a year later another CHF 750,000 on a note with a CHF 8 million cap. The Series A then comes in at CHF 3 million on a CHF 12 million The value agreed for a company immediately before new money is invested.More in glossary, or CHF 12 per share.
| Price per share | Shares | Ownership | |
|---|---|---|---|
| Founder | 1,000,000 | 68.1% | |
| Note 1, CHF 4m cap | CHF 4 | 125,000 | 8.5% |
| Note 2, CHF 8m cap | CHF 8 | 93,750 | 6.4% |
| Series A | CHF 12 | 250,000 | 17.0% |
| Total | 1,468,750 | 100% |
Because each note converts at its cap, the founder ends up with 68 percent of the company, against the 74 percent they would hold if both notes had converted at the round price. That is before interest, and before a Series A lead insists that the notes convert inside the pre-money valuation, which moves even more of the cost onto the founder.
The lack of formal governance (no board seats and no defined ownership percentage) can also leave investors in an ambiguous position that creates friction later.
None of this makes a CLA a bad instrument, but it does make it one that needs to be chosen deliberately. Used carelessly, it defers problems rather than solving them.
When to Use a CLA
A CLA is usually the right call when speed matters more than structure. Bridging between rounds, moving quickly to capture momentum, or bringing in early believers before the business has enough substance to justify a priced valuation. At pre-seed stage, when any number you put on the company is largely speculative, converting the valuation discussion into a future problem is often the honest thing to do.
It also works well when the investors involved already know the business. Existing backers do not need a priced round to make a decision. They are already convinced. A CLA lets them act on that conviction without creating unnecessary friction.
When Equity Is the Better Path
Once there is real traction, a willing The investor who sets the terms of a round, usually takes the largest position and coordinates the other investors.More in glossary, and a valuation that reflects something grounded in the business, equity is usually the cleaner choice. It gives founders and investors alike a clear picture of ownership from day one. It establishes governance properly. And it avoids the accumulation of notes that can complicate a future institutional raise.
If you are planning to approach institutional investors in the next twelve to eighteen months, a cap table that is already structured around equity is a simpler conversation. Notes that have not yet converted can raise questions you would rather not have to answer in a Series A process.
Raise with Intention
The instrument matters less than the reasoning behind it. A CLA chosen because it fits the moment is a good decision. A CLA chosen because it was easier than having a harder conversation is a problem deferred.
Before deciding, the questions worth asking are straightforward. What is this round actually trying to achieve? Who is investing, and what do they need from the structure? Is this a bridge or a foundation? What does the cap table look like after conversion, and is that something you are comfortable with?
The founders who navigate early-stage fundraising well are the ones who treat each round as a structural decision as much as a capital one. The form of the investment shapes the relationships, the governance, and the optionality that follow from it.
If none of the available instruments fits cleanly, that is usually a sign the terms need more work before the round opens.
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