Loan Note Subscription Agreement Guide

Raising capital is one of the biggest hurdles for Australian startups and small businesses. If you’re not ready to give away equity (or you want to delay setting a valuation), you might be considering a loan note subscription agreement.

These documents are common in early-stage funding because they can be faster and simpler than a full equity round - but they still carry real legal and commercial risk if the terms aren’t clear (or if you accidentally create terms that don’t match what you intended).

In this guide, we’ll walk you through what a loan note subscription agreement is, when it makes sense, what clauses to watch, and how to approach the process so you can raise funds with confidence.

Note: This article is general information only and isn’t legal, financial or tax advice. Loan notes (including convertible notes) can have tax and accounting implications for both the company and investors, so it’s worth getting advice that fits your circumstances.

What Is A Loan Note Subscription Agreement?

A loan note subscription agreement is a contract where an investor (the “subscriber”) agrees to provide money to your business in exchange for a loan note.

That loan note is essentially a debt instrument - your company owes the investor the amount invested (the principal), plus any interest, and must repay it unless it converts into equity or is otherwise dealt with under the agreed terms.

How It Usually Works In Practice

While the exact structure varies, the typical deal looks like this:

Investor subscribes for loan notes by paying funds to your company.
Your company issues loan notes to the investor under the agreed terms.
The loan notes either:
- convert into shares later (often at a discount), or
- get repaid on maturity (sometimes with interest), or
- convert or repay on certain trigger events (like a capital raise or an exit).

Is A Loan Note The Same As A Convertible Note?

Often, people use “loan note” and “convertible note” interchangeably. In plain English:

A loan note is a form of debt (a promise to repay) and may or may not convert to equity.
A convertible note is a loan note designed to convert into shares in certain circumstances.

So, many loan note subscription agreements are effectively convertible note subscription agreements - but you should always check the actual conversion mechanics in the document rather than relying on the label.

When Does A Loan Note Subscription Agreement Make Sense?

A loan note subscription agreement can be a good fit when you need to raise money quickly, you’re still building traction, or you’re not ready to lock in a company valuation.

Common scenarios include:

Pre-seed or seed funding where you expect a priced equity round later.
Bridge funding to extend runway until your next raise.
Strategic investors who want a clear path to equity later, but are comfortable starting as a lender.
Funding with fewer moving parts compared to a full share subscription round.

Why Startups Like Them

From a founder’s perspective, loan notes can be appealing because:

they can be quicker than negotiating a full equity investment,
you can potentially delay valuation until you have more data,
you may avoid immediate dilution (depending on conversion terms), and
the documents may be simpler than a full set of equity round documents.

What You Need To Be Careful About

The “easy” feel of a loan note can be misleading.

It’s still a legally binding funding arrangement, and it can create real pressure on your business if (for example) the notes reach maturity and you’re expected to repay, or if the investor has enforcement rights that don’t align with how you plan to run the company.

If you’re unsure how the loan note will interact with your cap table and your future funding plans, it can also be worth getting your broader corporate set-up right - including a Company Constitution and, where relevant, a Shareholders Agreement.

Key Terms In A Loan Note Subscription Agreement (And Why They Matter)

Most loan note subscription agreements cover a similar set of commercial issues. The difference between a healthy deal and a risky one is usually in the details.

Below are the clauses we commonly see founders overlook - and why you should pay close attention.

1. Principal Amount And Funding Mechanics

This part confirms:

how much the investor is investing,
when the funds are paid (one-off or in tranches), and
any conditions that must be met before funds are released (conditions precedent).

If the investor is paying in tranches, make sure the milestone triggers are clear and measurable. Ambiguity here can cause disputes right when your cash flow is tight.

2. Interest Rate (Or “No Interest”)

Loan notes may accrue interest, or they may be “zero interest” notes.

Even if the note is intended to convert to equity, interest still matters because it can:

increase the conversion amount (meaning more shares issued to the investor), or
increase the repayment amount if conversion doesn’t occur.

Also check whether interest is:

simple or compounded, and
paid periodically or rolled up until maturity/conversion.

3. Maturity Date (And What Happens If You Don’t Repay)

The maturity date is the date the loan is due to be repaid if it hasn’t converted.

This is a big issue for startups. If you can’t repay at maturity and the note doesn’t convert automatically, your company may be in default - and the investor may be able to take enforcement action.

It’s common to negotiate:

an extension option (by agreement),
automatic conversion at maturity, or
a clear process for handling maturity if no priced round has happened.

4. Conversion Events

If your loan note is convertible, the agreement should clearly define when conversion happens, such as:

a qualifying financing round (e.g. raising at least $X in new equity),
an exit event (sale of shares or assets), or
maturity.

Without a well-defined conversion trigger, you can end up in limbo - and uncertainty is the enemy of future fundraising.

5. Conversion Price, Discount And Valuation Cap

These are some of the most negotiated terms in any loan note subscription agreement.

Discount: the investor converts at a discount to the share price paid by new investors in a later round (e.g. 15–25%).
Valuation cap: a maximum valuation used for conversion calculations, which rewards the investor if the company’s valuation increases significantly later.

From your side, you want terms that are attractive enough to raise capital now, without setting your future cap table up for unintended dilution.

6. Security (Secured Vs Unsecured Notes)

Some loan notes are unsecured (meaning the investor is essentially an unsecured creditor), while others are secured (meaning the investor has security over certain company assets).

If the note is secured, you should understand:

what assets are covered,
what enforcement rights the investor has if there’s a default, and
how this might affect your ability to raise bank finance or further investment later.

Security interests in Australia are often registered on the Personal Property Securities Register (PPSR). It’s worth understanding how registrations work in practice - for example, through a PPSR check and ensuring registrations are accurate and consistent with the deal terms.

7. Events Of Default

Default clauses are where “friendly early-stage funding” can quietly become high-risk.

Events of default often include:

failure to repay at maturity,
insolvency events,
breach of key obligations,
misleading statements, or
certain changes in control.

Check what happens on default. Does the investor get:

the right to demand immediate repayment?
penalty interest?
enforcement rights over secured assets?
the right to enforce their security (for example, by appointing a receiver) or otherwise pursue insolvency processes, depending on the structure and applicable law?

8. Investor Information Rights And Control

Even though loan notes are “debt”, investors may seek:

regular reporting (management accounts, budgets, KPI updates),
inspection or audit rights, and/or
consent rights over major decisions (like selling assets or raising more debt).

These aren’t automatically “bad” terms - but you should make sure they’re realistic for your stage and won’t slow you down operationally.

What Other Documents Do You Usually Need Alongside The Loan Note Subscription Agreement?

A loan note subscription agreement is rarely the only document you’ll need. Your full “transaction pack” depends on your company structure, how many investors are involved, and whether the notes convert into equity later.

Common supporting documents include:

Loan note instrument / note terms: sometimes separate from the subscription agreement, setting out the detailed terms of the notes themselves.
Board and shareholder approvals: internal resolutions approving the issue of notes and the transaction (especially important for companies).
Cap table and conversion mechanics summary: not always a legal document, but extremely useful to avoid misunderstandings.
Confidentiality agreement (NDA): if you’re disclosing sensitive information during negotiations.
Updates to governance documents: to ensure your constitution and shareholder arrangements allow for the issue and conversion of notes.

If you’re bringing in multiple founders or investors (or you’re planning to do so), it’s often worth putting the ground rules in place early with a Shareholders Agreement, especially around decision-making, exits, and funding rounds.

Common Mistakes Founders Make With Loan Notes (And How To Avoid Them)

Most problems with loan notes don’t come from the idea of using debt - they come from unclear drafting or not thinking far enough ahead.

1. Treating The Loan Note As “Just A Simple IOU”

A loan note subscription agreement can contain rights that significantly impact your business (and future fundraising), including default rights, security, and consent requirements.

Before you sign, make sure you understand:

what happens if you don’t raise the next round in time, and
what happens if you need to restructure the business.

2. Not Planning For The Next Capital Raise

Your next investor will look closely at any loan notes outstanding. If the conversion terms are messy, it can scare off new money or force a renegotiation at the worst time.

As a practical step, ask: “If a new investor reads these note terms, will they understand exactly what happens on conversion?”

3. Letting Security Terms Slip In Without Realising The Consequences

A secured loan note can limit your options later (including for traditional finance). If security is being granted, make sure it’s clearly scoped and properly registered.

This is also where PPSR compliance becomes important. If you’re dealing with secured arrangements, having a working understanding of PPSR registration can save you from costly surprises.

4. Overpromising In Warranties Or Statements

Some agreements include warranties from the company and founders about the business. These can cover things like:

ownership of IP,
no undisclosed liabilities,
compliance with laws, or
accuracy of information provided to the investor.

Warranties are serious. If they’re incorrect, you may be liable. If you’re unsure, it’s usually better to disclose issues clearly than “hope it’s fine”.

5. Forgetting Customer-Facing Compliance (Especially Online)

Investors (and future buyers) often expect that the business has the basics covered, like compliant website terms, privacy compliance, and consumer law compliance.

If your business collects personal information (for example, emails, phone numbers, delivery addresses, or payment details), a Privacy Policy is often a practical necessity - and sometimes a legal one depending on your business and turnover.

And if you’re selling products or services, your terms, refunds, and advertising should align with the Australian Consumer Law (ACL). A surprising number of disputes start with unclear refund expectations - so it’s worth getting your customer terms right from the start.

Key Takeaways

A loan note subscription agreement is a funding contract where an investor provides money in exchange for loan notes (debt), often with a pathway to convert into equity later.
Loan notes can be useful for startups and small businesses when you want to raise capital without setting a valuation immediately, but you still need to manage repayment and default risk.
Key clauses to focus on include interest, maturity date, conversion triggers, valuation caps/discounts, security, and events of default.
If loan notes are secured, you should understand how security interests work in Australia, including PPSR registrations and how they may affect future finance.
Think ahead to your next fundraising round - messy conversion terms can complicate or delay future investment.
Strong supporting documents and governance (like a Company Constitution and Shareholders Agreement) help ensure the funding structure fits your business as it grows.

If you’d like a consultation on a loan note subscription agreement (or raising capital more broadly), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

Official Sources to Check

Rules and regulator guidance can change. Check the current official material most relevant to this issue before relying on the article:

ACCC: Contracts and unfair contract terms

Loan Note Subscription Agreement Guide For Australian Startups And SMEs