Convertible Notes vs Equity Placements: What's Right for Your Raise?

When a private or listed company needs capital quickly, the two most common structures are an equity placement and a convertible note. Both put cash on the balance sheet, but they treat investors very differently and create different downstream consequences. Choosing well requires more than picking the option with the lowest cost or fastest timeline.

Equity placements: speed and simplicity

In an equity placement, investors subscribe for new ordinary shares (or another class of equity) at an agreed price. The company receives cash, the investors receive shares, and the cap table reflects the new ownership immediately.

For listed companies, placements are typically made under Listing Rule 7.1 or 7.1A and to investors who are not retail (sophisticated, professional or otherwise excluded under section 708). For private companies, the same section 708 exemptions apply.

Advantages:

• Simple structure and documentation
• Fast execution, typically within days
• Clean cap table outcome
• Investors get immediate exposure to the company

Disadvantages:

• Requires a settled valuation
• Immediate dilution to existing shareholders
• For listed companies, capacity limits under Listing Rule 7.1
• Less protection for investors if the company underperforms

Convertible notes: flexibility with deferred dilution

A convertible note is a loan that converts into shares on the occurrence of a defined event, usually a future capital raising or IPO. The note typically pays interest and converts at a discount or at a specified valuation cap.

Advantages:

• No need to fix valuation immediately
• Useful for bridging between rounds
• Can include downside protection (interest accrual, repayment on default)
• Often quicker to negotiate when valuation is uncertain

Disadvantages:

• More complex documentation
• Tax and accounting treatment differs from equity
• Conversion mechanics can complicate later capital raises
• Compounding interest and discount can create significant dilution at conversion

Which to choose?

Use a placement if:

• Valuation is settled and accepted by investors
• You need a clean cap table for an upcoming process (e.g. IPO, M&A)
• Investors are seeking immediate equity exposure
• The company is listed and capacity is available under Listing Rule 7.1

Use a convertible note if:

• Valuation is contested or uncertain
• The raise is a bridge to a known future event
• Investors are seeking some downside protection
• Speed of execution matters more than perfect equity structure

Common pitfalls

We see the same issues recur:

• Convertible notes that do not deal cleanly with what happens if the conversion event does not occur within the expected timeframe
• Discount rates and valuation caps that create unintended dilution outcomes
• Notes issued on inconsistent terms across investors, complicating later rounds
• Listed companies issuing convertible notes that breach Listing Rule 7.1 capacity if not properly structured
• Anti-dilution clauses that conflict with later commercial decisions

A note on hybrid structures

Some raises combine both: a placement for some investors who want immediate equity, and a convertible note for others who want optionality. This can work, but it requires very careful coordination to avoid inconsistent treatment of investors.

How Luma Legal can help

We advise companies, boards and investors on capital raising structures across both private and listed markets. We help you choose the right structure, document it cleanly, and execute within the timeline.