Not every round should start with a convertible.
A convertible loan agreement 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 genuinely attractive. The problem is that convenience has a way of becoming habit, and habit is a poor substitute for judgment.
The CLA is a useful instrument. It is not always the right one.
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 cap table can produce unexpected dilution at the conversion event. Founders sometimes discover, mid-Series A, that they have promised more of the company than they realised. The lack of formal governance that comes with convertible notes, no board seats, 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. It makes it an instrument that requires intention. 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 convicted. 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 lead investor, 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, not just a capital one. The form of the investment shapes the relationships, the governance, and the optionality that follow from it.
Choose the instrument that fits the moment. If none of the available instruments fit cleanly, that is usually a sign the terms need more work before the round opens.
