Early-stage Singapore startups raising their first cheque almost always do so via a convertible note or Simple Agreement for Future Equity (SAFE) rather than a priced equity round. The reason is simple: putting a number on a pre-revenue company is hard, slow, and often produces an answer everyone regrets six months later. Convertibles defer the valuation question to the next priced round, when there is more data and more buyer competition to set a price.
Both instruments are well-understood in Singapore but they sit awkwardly across two regimes — the Companies Act 1967 (which governs share issues, debentures and constitutional limits) and the Income Tax Act 1947 (which determines whether interest accrues, whether the discount on conversion is taxable, and how stamp duty arises on the eventual share allotment).
This guide walks through the legal structure of convertible notes and SAFEs as commonly used in Singapore, the standard terms (valuation cap, discount rate, MFN, conversion triggers), the tax and stamp duty position, and the practical board and shareholder steps required to issue them properly.
What Is a Convertible Note?
A convertible note is a debt instrument issued by the company to an investor. The investor lends the company a sum of money. The note carries an interest rate (commonly 4-8% per annum, simple, accruing) and a maturity date (typically 18-24 months). On a defined “qualifying financing” event — usually the company’s next priced equity round above a defined threshold — the note converts into shares at a discount to the round price, or at a price set by reference to a valuation cap, whichever is more favourable to the investor.
Because it is debt, a convertible note has the legal characteristics of a debenture under section 4(1) of the Companies Act 1967. The company’s constitution must permit the issue, and a board resolution is required. If the note is offered to the public or to more than 50 persons, the prospectus requirements under the Securities and Futures Act 2001 are engaged — small private rounds rely on the small offer or accredited investor exemptions.
What Is a SAFE?
The Simple Agreement for Future Equity (SAFE) was introduced by Y Combinator in 2013 as a simpler alternative to convertible notes. A SAFE is not debt. It is a contractual right to receive shares in the company on a future trigger event. There is no maturity date, no interest, and no obligation to repay if the trigger event never occurs.
Because a SAFE is not a debenture, it largely sits outside the Companies Act provisions on debt instruments. It is, however, still a security under the Securities and Futures Act, and the same prospectus exemptions apply.
SAFEs are used heavily in Singapore by accelerator-backed startups and by US-influenced tech founders. Convertible notes remain the dominant instrument for European and Asian investors who prefer the comfort of debt.
The Standard Terms
Valuation cap
The valuation cap sets a ceiling on the share price the investor will pay on conversion, regardless of how high the priced round’s pre-money valuation turns out to be. If the next round is at S$10 million pre-money but the cap was S$5 million, the convertible converts as if the round had been at S$5 million — meaning the early investor gets twice as many shares per dollar as the new round investor.
Caps protect early investors from the founders pricing them out of the success they helped fund. They are the single most heavily-negotiated term in any Singapore convertible.
Discount rate
The discount rate is the percentage discount the convertible holder gets to the priced-round share price. Common discounts are 15-25%. So if the next round is at S$1.00 per share and the discount is 20%, the convertible converts at S$0.80.
Where both a cap and a discount apply, the investor gets the lower of the two implied prices on conversion.
Maturity (convertible notes only)
If no qualifying financing event happens before the maturity date, what happens? Three options are common:
- Repayment in cash with accrued interest (debt-like behaviour)
- Automatic conversion at the cap price into preferred or ordinary shares
- Maturity extension by mutual agreement
The first option is rare in practice — most early-stage companies do not have the cash to repay maturing notes, and noteholders rarely want to push the company into insolvency. Automatic conversion at the cap is the most workable for both sides.
Most-Favoured-Nation (MFN)
An MFN clause entitles the holder to the better of their existing terms and any subsequently-issued convertible terms. If the company issues a later note with a lower cap or higher discount, the earlier holder can elect to adopt those terms. MFN is standard in YC-style SAFEs and increasingly common in Singapore convertibles.
Pro-rata rights
Pro-rata rights entitle the convertible holder to participate in future equity rounds up to their existing percentage. They are negotiable; founders usually grant them to lead-cheque investors and resist them for everyone else.
Conversion mechanics
The note or SAFE typically converts on the earliest of:
- Qualifying financing — usually the next priced equity round above a defined threshold (e.g., S$1 million in new money)
- Liquidity event — a sale of the company, IPO, or other change of control
- Maturity (for convertible notes only)
Singapore Tax Treatment
Convertible notes — interest
Interest accruing on a Singapore-issued convertible note is generally:
- Taxable to the noteholder as Singapore-source interest income (if the funds are deployed in Singapore)
- Subject to 15% withholding tax under section 45 of the Income Tax Act if paid to a non-resident, unless reduced under a double tax agreement
- Deductible to the company if the note is used to fund a trade carried on in Singapore
Most Singapore startups structure interest as accruing not paying until conversion, with the accrued interest converting into shares alongside the principal at the cap or discount price. This avoids the practical headache of withholding tax compliance during the life of the note. Be aware that even accrued (unpaid) interest can trigger withholding obligations for non-resident holders depending on the timing of the deemed payment.
SAFEs — no interest, no withholding
Because a SAFE is not debt and carries no interest, there is no withholding tax issue during its life. The instrument simply sits on the company’s balance sheet (typically as a separate equity-instrument line) until conversion or expiry.
Discount on conversion
The discount the convertible holder receives on conversion (the difference between the priced-round share price and the discounted conversion price) is generally not treated as taxable income to the investor under current IRAS practice — it is part of the consideration for taking early-stage risk and is reflected in the cost base of the resulting shares. Singapore does not tax capital gains, so any subsequent share-price appreciation is not taxed either, provided the investor is not deemed to be trading in shares.
For background on Singapore’s capital-gains-free regime and the IRAS factors used to test trading vs investment, see our corporate tax 2026 guide.
Stamp duty on conversion
The issue of new shares to the convertible holder on conversion is an issue of new shares by the company, not a transfer between two parties. Issues of new shares are not subject to stamp duty under the Stamp Duties Act 1929. (Stamp duty arises only on transfers, not allotments.)
For background on share-transfer stamp duty and IRAS valuation methods, our stamp duty on share transfers guide covers the secondary-market position.
Board and Shareholder Steps
Issuing a convertible note or SAFE in Singapore is not a board-only matter. Several layers of authorisation are typically required.
Pre-emption rights
If the company’s constitution or shareholders’ agreement contains pre-emption rights on share issues, the issue of a convertible (which converts into shares) is usually caught. Either obtain pre-emption waivers from existing shareholders, or follow the offer-round procedure required by the constitution. Failure to do this is a common cause of disputes in subsequent rounds.
Board resolution
The directors pass a resolution approving:
- The terms of the convertible (or SAFE)
- The execution of the convertible note instrument or SAFE agreement
- Any conditional share allotment for the conversion event
For practical templates, see our board resolutions guide.
Shareholders’ resolution (often required)
Section 161 of the Companies Act prevents directors from issuing new shares without shareholder authorisation. Where the convertible converts into new shares, that authorisation should be obtained at the time of the convertible issue (not at the time of conversion) so the conversion can happen automatically without a fresh shareholders’ resolution.
For mechanics of share allotments and transfers, see our share allotment and transfer guide.
ACRA filings on conversion
When the convertible converts into shares, the company files Form 24 (Return of Allotment of Shares) with ACRA within 14 days under section 63 of the Companies Act. Stamp duty does not apply to allotments, but penalties do apply to late filings.
Common Pitfalls
- Issuing convertibles without shareholder authority. The conversion event will trigger an issue of new shares; that issue requires a section 161 mandate. Sort the mandate at the time of the convertible issue, not later.
- Caps that imply unsustainable economics. A S$2 million cap on a S$500,000 raise translates into 25% of the company being given away — too much for the next round’s investors to swallow comfortably. Founders should model the cap-table impact of the cap before agreeing to it.
- Ignoring the maturity trigger. A convertible that matures without a qualifying round forces a difficult conversation. Build the maturity-conversion mechanic into the note terms upfront.
- SAFEs versus convertibles in the same round. Mixing instruments in the same round can produce inconsistent conversion outcomes. Pick one instrument and stick with it.
- Tax inefficiency of accrued interest. Investors in jurisdictions that tax accrued (not received) interest may face annual tax liabilities even though they receive no cash. Discuss with the lead investor before fixing the interest rate.
- Forgetting the pre-emption waivers. Existing shareholders who were not offered the convertible round can challenge the issue. Get the waivers in writing.
Convertible vs SAFE: Which Should You Use?
| Feature | Convertible Note | SAFE |
|---|---|---|
| Legal nature | Debt (debenture) | Contractual right to future shares |
| Interest | Yes — typically 4-8% accruing | No |
| Maturity date | Yes — typically 18-24 months | No |
| Withholding tax on interest (non-residents) | 15% under Section 45 ITA | N/A |
| Repayment if no qualifying round | Possible (rare in practice) | Not contractually required |
| Investor protection if company fails | Stronger (creditor) | Weaker (subordinated) |
| Typical use | European/Asian investors, larger cheques | YC-style accelerator deals, smaller cheques |
| Drafting complexity | Higher | Lower (single-page templates exist) |
For a US-influenced founder team raising small cheques quickly, a SAFE is usually the right answer. For a Singapore-incorporated company raising from regional family offices or Asian VCs, a convertible note carrying modest interest is usually preferred.
What Investors Look For
Beyond the headline cap and discount, sophisticated investors will negotiate:
- Information rights: Quarterly financial reporting, board observer rights, annual budget approval
- Anti-dilution mechanics on the converted shares (full ratchet vs broad-based weighted average)
- Liquidation preference on the converted shares (1x non-participating is standard)
- Drag-along rights on the converted shares (see our drag-along rights guide)
- Approval rights over future debt issuance, IP transfers, and major asset sales
These terms are typically baked into the form of preferred shares the convertible converts into, not into the convertible itself. The convertible just sets the price and timing of conversion.
Conclusion
Convertible notes and SAFEs let founders raise their first money without fixing a valuation, and let investors take early-stage risk without overcomplicating the cap table. In Singapore, both are used widely and both are well-understood by ACRA and IRAS — the legal and tax framework is settled.
The drafting effort is real, however. Caps must be modelled against realistic next-round dilution. Maturity must be aligned to the company’s realistic fundraising timeline. Interest rates must reflect non-resident withholding implications. And the shareholder authorisation for the eventual share issue must be in place at the time the convertible is issued, not bolted on later.
If you are issuing your first convertible round, or reviewing terms a lead investor has put in front of you, the team at Raffles Corporate Services handles the corporate-secretarial side end-to-end — from board and shareholder resolutions, to the convertible note instrument, to the ACRA filings on conversion. We work alongside our sister site Singapore Secretary Services on the post-conversion cap table maintenance.
For the underlying statutes, see the Companies Act 1967 and the Securities and Futures Act 2001 on Singapore Statutes Online.
— The Editorial Team, Raffles Corporate Services