Convertible Loan Note Template for Pakistan

A Convertible Loan Note is a popular investment tool in Pakistan's startup ecosystem where investors lend money to a company with the option to convert that loan into equity shares later. It works like a regular loan but with a special twist - when certain events happen, like a major funding round or IPO, the loan can transform into company shares at a pre-agreed rate.

Under Pakistani banking and corporate laws, these notes help early-stage companies raise funds without setting a firm valuation right away. The investor gets interest payments while the loan is active, plus the potential upside of equity ownership if the company succeeds. Many Pakistani tech startups use these notes through SECP-registered arrangements, giving both parties flexibility while following local securities regulations.

Use a Convertible Loan Note when your startup needs quick funding but you're not ready to set a firm company valuation. This financing tool works especially well for Pakistani tech companies in their early stages, when traditional equity deals might be premature or bank loans too restrictive. It's particularly valuable during bridge funding rounds or when you're close to a major milestone that could significantly increase your company's value.

The SECP's regulatory framework makes these notes ideal for situations where investors want to support your growth while keeping their options open. They're perfect when you need capital within weeks rather than months, or when you want to incentivize early investors with a discount on future equity prices. Many Pakistani accelerators and angel investors prefer this structure for initial investments.

• Simple Interest Note: Basic convertible notes that accrue straightforward interest, popular among Pakistani angel investors for first-time investments under Rs. 10 million
• Valuation Cap Notes: Include a maximum conversion price, protecting early investors when company valuations rise sharply
• Discount Notes: Offer conversion at a discount to the next funding round, common in Pakistan's tech startup ecosystem
• SAFE-Style Notes: Modified for Pakistani regulations, these notes convert without interest and have fewer debt-like features
• Bridge Notes: Short-term convertible loans designed to fund companies until their next major financing round, often with strict SECP compliance terms

• Startup Founders: Initiate and sign these notes to secure funding while maintaining control over their company's early valuation
• Angel Investors: Provide the capital and negotiate key terms like conversion rates, valuation caps, and interest rates
• Corporate Lawyers: Draft and review the notes to ensure SECP compliance and protect both parties' interests
• Investment Banks: Often facilitate larger convertible note deals and help structure terms for institutional investors
• Company Directors: Must approve the issuance of convertible notes and ensure alignment with corporate governance requirements
• SECP Officials: Oversee regulatory compliance and maintain records of convertible note issuances

• Company Details: Gather registration number, business address, and directors' information as registered with SECP
• Investment Terms: Define loan amount, interest rate, maturity date, and conversion triggers
• Valuation Metrics: Determine company valuation cap and any discount rates for future equity conversion
• Security Details: Specify if the note will be secured against company assets or unsecured
• Investor Information: Collect complete legal names, addresses, and tax registration details of all participating investors
• Board Approval: Prepare board resolution authorizing the note issuance under Pakistani corporate law
• Compliance Check: Review SECP guidelines for convertible instruments and ensure all mandatory disclosures are included

• Principal Terms: Clear statement of loan amount, interest rate, and maturity date as per SBP guidelines
• Conversion Rights: Detailed mechanics of when and how the loan converts to equity shares
• Valuation Terms: Specified cap and/or discount rate for future equity conversion
• Events of Default: Defined circumstances triggering immediate repayment under Pakistani contract law
• Security Provisions: Description of any collateral or ranking of the note
• Governing Law: Express choice of Pakistani law and jurisdiction
• Shareholder Rights: Post-conversion voting and dividend rights aligned with SECP regulations
• Execution Block: Company seal, authorized signatures, and witness attestation requirements

A Convertible Loan Note differs significantly from a Loan Agreement in several key aspects under Pakistani law. While both are debt instruments, they serve distinct purposes and offer different benefits to the parties involved.

• Basic Structure: Convertible Loan Notes include an equity conversion feature, while standard Loan Agreements remain pure debt throughout their term
• Investment Purpose: Convertible Notes are primarily used for startup funding with future equity potential, whereas Loan Agreements focus on straightforward borrowing and repayment
• Risk Profile: Convertible Notes typically offer investors higher potential returns through equity conversion, balancing higher risks in early-stage companies
• Regulatory Framework: Under SECP guidelines, Convertible Notes require specific disclosures and conversion mechanisms, while Loan Agreements follow simpler SBP lending regulations
• Documentation Complexity: Convertible Notes include additional terms for valuation caps, discount rates, and conversion triggers that aren't present in standard Loan Agreements