Shareholder loan agreement template
Loan Agreement for a loan from a shareholder, containing more favourable terms for the borrowing company than a commercial loan as regards interest, repayment, events of default and other obligations.
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When do I use this document?
- for a loan to a company by an individual or corporate shareholder
- for a loan to be made in a single advance of the loan amount
- for a borrower which is a private limited company incorporated in England and Wales
What are the key features?
- short form loan agreement with less onerous provisions than a commercial loan
- 20 clauses over 10 pages
- alternative clauses depending on whether the loan is interest-free or carries interest
- flexible date to repay the loan
- undertakings from the borrower, including to provide accounting information and restrictions on dividends, granting of security and other borrowings
- events of default
What else do I need to know?
Generally, a company can be funded by its shareholders in one of two ways:
- equity: by the shareholders investing money in return for shares in the company
- debt: by the shareholders lending money to the company
If a shareholder receives equity in the company, the amount invested becomes part of the capital of the company and is not usually repayable in normal circumstances. On a winding-up of the company, the shareholder capital is only repaid once all other creditors of the company have received payment of the amounts owed to them by the company.
If a shareholder lends money to the company, the loan will be repayable by the company in accordance with the terms agreed between the shareholder and the company. These terms may include the payment of interest on the amount borrowed. On a winding-up of the company, the loan will rank equally for payment with the company’s other ordinary creditors and in priority to the company’s shareholders.
What terms are different for a shareholder loan?
A shareholder who makes a loan to a company has a joint interest in the company, as both a lender and shareholder.
The loan terms are likely to be less onerous than a third party or bank loan.
In particular:
- interest: a shareholder loan may be interest-free or with a lower interest rate than a third party loan. Interest may only be payable if the company is able to pay the interest
- repayment: a shareholder loan may only be repayable when the company is able to make repayments
- events of default: a shareholder loan may have less onerous events of default than a third party loan
When do I use this document?
- as an advance subscription agreement between the company and a single investor
- where the conversion price will be calculated as a percentage discount to the issue price for shares in the qualified investment round
- if agreed, where there is an agreed valuation cap on the company’s valuation
What are the key features?
- advance subscription terms and payment
- conversion on the occurrence of defined events, including a qualifying financing round, the sale of the company or on a longstop date
- conversion price on a qualified financing round to be at an agreed percentage discount to the qualified financing round share price
- if agreed, a cap on the valuation of the company for the purpose of calculating the conversion price
- warranties regarding the investor’s compliance with Financial Services and Markets Act 2000 regime regarding financial promotions
What else do I need to know?
For detailed discussion regarding the purpose of advance subscription agreements and their benefits and disadvantages for investors and the company, click here.
Negotiating points
Prior to entering into this ASA, the parties will need to consider and agree:
- discount rate: the discounted price per share (expressed as a percentage) at which the ASA investor will receive shares in the qualified financing round
- valuation cap: if agreed, the cap on the valuation of the company for the purpose of calculating the price at which the advance subscription will convert into shares on a qualified investment round
- default valuation: the default valuation of the company which will be used to calculate the conversion price of the advance subscription in circumstances where conversion occurs on the agreed longstop date or the company’s insolvency
- longstop date: the longstop date on which (and in the absence of a prior qualifying financing round) the ASA will automatically convert into shares
- qualified financing round: the minimum amount of funding which the company must raise before that funding round will count as the qualified financing round under the ASA which results in the conversion of the advance subscription into shares
- subscription amount: the amount of the investor’s advance subscription
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Updated by a lawyer on 21/07/2025
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