Most Singapore startups raise their first cheque on a convertible note or a SAFE (Simple Agreement for Future Equity) — not a priced equity round. The reason is simple: founders and angels usually agree the company has value, but they cannot agree on a number. A convertible instrument lets both sides defer that argument to the next round, when a lead VC will set the price. Done well, it is fast, cheap, and standardised. Done badly, it leaves founders with cap tables that no Series A investor will touch.
This guide walks through how convertible notes and SAFEs work under Singapore law, the key economic terms (valuation cap, discount, MFN, maturity), the differences between a US Y Combinator SAFE and a Singapore-adapted version, and the corporate actions you must take when these instruments eventually convert.
1. What is a convertible note and what is a SAFE?
A convertible note is a short-term debt instrument issued by the company to an investor. It accrues interest (typically 4%–8% per annum) and matures on a fixed date (usually 18–24 months). On maturity, the note either converts into shares at a future qualified financing round, or — if no round occurs — is repayable, extendable, or converts at a default conversion event. It is a loan that wants to become equity.
A SAFE (Simple Agreement for Future Equity) is not debt. It is a contract giving the investor a right to receive shares in the company at a future qualified financing round, at a discount or capped valuation. There is no interest, no maturity date, and no obligation to repay. Y Combinator open-sourced the SAFE in 2013 and Singapore startups have used it heavily since around 2017.
Why founders prefer convertible instruments at pre-seed and seed
- Speed: a SAFE can close in days; a priced round takes 4–8 weeks.
- Low legal cost: SGD 2,000–5,000 in legal fees versus SGD 25,000+ for a Series Seed equity round.
- No valuation today: the valuation cap and discount give the investor downside protection without locking in a number.
- No board changes: the investor does not get a board seat or voting rights until conversion.
2. Key economic terms you must understand
Valuation cap
The maximum company valuation at which the investor’s money will convert into shares. If the next round prices the company higher than the cap, the investor still converts at the cap — which means they get more shares (and a lower effective price per share) than later investors. The cap is the single most negotiated term in any SAFE or note.
Discount
A percentage discount (typically 15%–25%) on the price the next-round investor pays. If the Series A is priced at SGD 1.00 per share and the discount is 20%, the SAFE holder converts at SGD 0.80 per share. Investors usually receive whichever is more favourable — the cap or the discount.
Most Favoured Nation (MFN)
If the company issues another convertible instrument later on better terms, MFN gives the earlier investor the right to adopt those better terms. Common in pre-seed where lots of small cheques close on slightly different paperwork.
Qualified financing threshold
The minimum equity round size that triggers automatic conversion. Often SGD 1m–5m. Below this threshold, the SAFE does not automatically convert — important so that small follow-on cheques do not accidentally force conversion at an unfavourable price.
Pre-money vs post-money SAFE
Y Combinator’s 2018 update moved the SAFE from pre-money to post-money. Under a post-money SAFE, the investor’s ownership percentage is fixed at conversion — meaning subsequent SAFE rounds dilute the founders only, not the earlier investor. Founders signing post-money SAFEs must run a careful dilution model before signing.
3. Singapore-specific drafting issues
Y Combinator’s standard SAFE assumes Delaware law and US corporate concepts. A Singapore Pte Ltd needs adjustments:
- Governing law clause: change to Singapore law and Singapore courts.
- Authorised share capital: Singapore companies abolished par value in 2006, but the constitution may still cap the number of issuable shares. Check before signing.
- Pre-emptive rights: existing shareholders may have rights of first refusal under the constitution or a shareholders’ agreement. The SAFE conversion must work around these.
- Section 76 financial assistance prohibition: if the company is helping a buyer acquire its shares (e.g. via a buy-back funded SAFE), the Companies Act prohibition under Section 76 may bite.
- Stamp duty: Singapore stamp duty applies to share transfers, not to issues of new shares. So conversion of a SAFE into newly issued shares is not stampable.
- ACRA filings: on conversion, the company must file a Return of Allotment within 14 days under Section 63 of the Companies Act.
4. Convertible note vs SAFE: which one for your raise?
| Feature | Convertible Note | SAFE |
|---|---|---|
| Legal nature | Debt | Right to future equity (not debt) |
| Interest | Yes (4%–8% p.a.) | No |
| Maturity date | Yes (typically 18–24 months) | No |
| Repayment if no conversion | Investor can demand | None |
| Investor in winding up | Ranks as unsecured creditor | Ranks behind creditors, before shareholders |
| Stamp duty | None on issue; none on conversion | None |
| Best for | Risk-averse angels; bridge rounds | Pre-seed/seed; multiple small cheques |
For founders, the SAFE is usually friendlier — no interest accrual, no maturity pressure, and no risk of an unfriendly demand for repayment if the next round is delayed. For investors, the note is friendlier — interest plus a fallback right to repayment if conversion never happens.
5. The conversion mechanics — corporate actions required
When a SAFE or note converts at a qualified equity round, the company must:
- Pass a directors’ resolution approving the allotment.
- Pass an ordinary or special resolution of shareholders if the constitution requires shareholder approval for the issue of shares (most do).
- Issue the new shares in the agreed class (almost always preference shares in the Series A round) at the conversion price.
- Update the register of members and issue share certificates.
- File a Return of Allotment (NRA) with ACRA within 14 days under Section 63.
- Update the cap table and any shareholders’ agreement schedule.
For step-by-step share allotment guidance, see our Singapore share allotment guide and our walkthrough on preference shares.
6. Tax treatment in Singapore
For the company:
- SAFE proceeds are not taxable income — they are capital introduced.
- Note interest, if paid in cash, is a deductible business expense to the extent the loan is used for income-producing purposes.
- Issue of shares on conversion is not a taxable event for the company.
For the investor:
- Note interest is generally taxable as income in the investor’s hands.
- Gains on conversion and subsequent sale of shares are usually capital in nature and not taxable for an individual angel investor, but the safe harbour under Section 13Z only applies to corporate divestments. Individual investors rely on the general principle that Singapore does not tax capital gains.
- If interest is paid to a non-resident investor, withholding tax under Section 45 may apply.
7. Common founder mistakes
- Stacking SAFEs without modelling dilution. Five post-money SAFEs at SGD 100k each can dilute founders by 25%+ before a priced round even happens.
- Different valuation caps with no MFN. A later investor on a SGD 5m cap may discover an earlier investor closed on a SGD 3m cap — and demands renegotiation.
- Forgetting maturity on a note. An angel can sue for repayment on the maturity date if no Series A has closed. Extend the maturity in writing well before it hits.
- Issuing without board/shareholder approval. Conversion into shares without proper resolutions is voidable.
- Skipping the Section 63 ACRA filing. Late returns of allotment incur penalties and look bad to Series A diligence.
8. Practical checklist before signing
- Run a dilution model showing where the cap table sits after this SAFE — and after the next priced round.
- Confirm the constitution permits the issue of the relevant share class.
- Check pre-emptive rights in the shareholders’ agreement.
- Use a Singapore-adapted template — do not use the raw YC SAFE without legal review.
- Keep a single signed PDF per investor and update the cap table on the same day.
- For a note: diary the maturity date 60 days ahead so you can negotiate an extension if needed.
9. Frequently asked questions
Can a Singapore Pte Ltd issue a SAFE to an overseas investor?
Yes. There is no exchange control restriction. The investor must complete KYC/AML checks under the company’s anti-money-laundering policy, but otherwise the SAFE is simply a contract between the company and the foreign investor.
Does a SAFE require shareholder approval?
The signing of the SAFE itself does not require shareholder approval — it is a contract, not a share issue. However, the eventual conversion into shares will require the company to allot new shares, and most constitutions require shareholder authority to allot shares (renewed at each AGM). Founders typically obtain a blanket share-allotment authority at the AGM so conversions can happen without a separate EGM.
What happens to a SAFE if the company is acquired before any Series A?
Standard YC SAFEs include an “exit” provision: on a change of control before conversion, the SAFE investor can choose either (a) cash equal to their original investment, or (b) shares immediately before the acquisition at the valuation cap. Singapore-adapted SAFEs preserve this mechanic.
Can I use a single SAFE template for all investors?
Only if every investor agrees identical economic terms (same cap, same discount, same MFN). If different investors negotiate different caps, you will need separate SAFEs and an MFN clause to keep them honest.
For broader founder financing guidance see our notes on Section 13H VC tax incentives and on structuring equity vs contractual JVs.
Raffles Corporate Services helps founders close convertible rounds end-to-end: drafting Singapore-adapted SAFE and note templates, running cap table and dilution models, passing the board and shareholder resolutions on conversion, and filing the Return of Allotment with ACRA. Talk to us before you sign — small drafting choices at pre-seed determine whether the Series A actually closes.
— The Editorial Team, Raffles Corporate Services