Singapore has become one of Asia’s leading startup hubs, and with that growth comes the need for financing instruments that let founders raise early capital without a full priced equity round. Two instruments dominate the landscape: the convertible note (imported from US venture practice) and the SAFE (Simple Agreement for Future Equity). Both convert to equity later, but they behave very differently for accounting, cap-table and Companies Act compliance.
This guide explains how each instrument works under Singapore law, what founders and investors should watch for, and what the corporate secretary needs to do when they convert.
Why Startups Use Convertibles Instead of Equity Rounds
Early-stage financing has one difficult problem: no one can price the company reliably. A seed-stage startup with two founders, ten customers and $50,000 in revenue could be worth anywhere between $1 million and $10 million depending on the story told and the investor met. Rather than fight over valuation, founders and angels agree to defer the price to the next priced round.
A convertible instrument gives the investor cash-in-now, equity-later. On conversion, the amount invested (plus, sometimes, interest) buys shares at a discount to the next round’s price — usually 15% to 25% — or at a fixed “valuation cap”, whichever gives the investor more shares.
Convertible Notes: The Traditional Instrument
A convertible note is a debt instrument. On the balance sheet it sits as a liability. It carries a maturity date (often 18–24 months) and a coupon (typically 5–8%). If a qualified financing round happens before maturity, the note converts. If it doesn’t, the investor can demand repayment or (more commonly) negotiate an extension or conversion at a fallback valuation.
Common terms include:
- Discount rate: 20% is standard.
- Valuation cap: The maximum pre-money valuation used for conversion, even if the round itself is priced higher.
- Interest rate: Accrued interest is usually added to the principal at conversion.
- Maturity date: Typically 18–24 months from issuance.
- Qualified financing threshold: A minimum round size (e.g. S$1 million) below which conversion is not triggered.
Key Singapore Companies Act considerations
A convertible note is a “debenture” under Section 4 of the Companies Act 1967. Companies Act implications include:
- Section 84 (Prospectus): Issuing notes to more than 50 investors, or to retail investors, may trigger prospectus requirements under the Securities and Futures Act. Angel and small-syndicate rounds usually rely on the SFA Section 275 accredited investor exemption.
- Register of debenture holders: A separate register must be maintained under Section 93.
- Registration of charges: If the note is secured, the charge must be registered with ACRA within 30 days under Section 131.
- Interest deductibility: Interest accrued on convertible notes is generally deductible under Section 14(1)(a) of the Income Tax Act, provided it is incurred to produce income.
SAFEs: The Silicon Valley Import
The SAFE was invented by Y Combinator in 2013 as a simpler alternative to convertible notes. In Singapore practice, most SAFEs are drafted using the Y Combinator template but modified to reflect local law. Unlike a convertible note, a SAFE is not a debt instrument. It carries no interest, no maturity date and no repayment obligation.
Instead, the SAFE gives the investor a contractual right to receive shares on a future trigger event — typically a qualified equity financing, a sale of the company, or an IPO. If none of those events occurs, the investor’s money stays in the company indefinitely.
SAFE variants
Three main SAFE templates are used in Singapore:
- Discount-only SAFE: Converts at a discount (e.g. 20%) to the next round price, with no cap.
- Cap-only SAFE: Converts at the lower of (a) the next round price or (b) the price implied by the cap.
- Discount + Cap SAFE: Investor gets the more favourable of the discount or the cap.
Post-2018, Y Combinator moved to a post-money SAFE — meaning the cap represents post-money valuation rather than pre-money. This subtle shift protects existing SAFE holders from dilution caused by later SAFEs. Founders should model both post-money and pre-money outcomes carefully before choosing.
Singapore accounting treatment of SAFEs
SAFEs sit in an awkward space in Singapore Financial Reporting Standards (SFRS). They are neither debt nor equity in the traditional sense. Common treatments include:
- Financial liability: If the SAFE contains a “put” (right to demand cash back in certain scenarios), it is a liability under SFRS(I) 9.
- Equity instrument: If it converts only to a variable number of shares based on future price, it may qualify as equity.
- Hybrid instrument: Many SAFEs are bifurcated between a host liability and an embedded derivative.
Founders should engage their accountant early — some SAFE features cause revaluation losses to hit the P&L every year until conversion.
Convertible Notes vs SAFEs: Side-by-Side
| Feature | Convertible Note | SAFE |
|---|---|---|
| Legal nature | Debt (debenture) | Contract right to future shares |
| Interest | Yes (typically 5–8%) | No |
| Maturity date | Yes (18–24 months) | No |
| Repayment on failure to convert | Yes, on maturity | Only on liquidation event |
| Balance sheet treatment | Liability | Usually liability, sometimes equity |
| Requires debenture register | Yes (Section 93) | No |
| Complexity | Higher | Lower |
| Founder-friendly | Less | More |
What Happens at Conversion
When the trigger event occurs — typically a Series A round — the convertible converts to shares. The corporate secretary must:
- Compute the conversion price using the discount and/or cap formula.
- Compute the number of shares to be issued to the convertible holder.
- Pass board and shareholder resolutions authorising the allotment.
- File Notice of Return of Allotment with ACRA within 14 days (Section 63).
- Update the register of members.
- Issue share certificates.
- For convertible notes only: update the debenture register to reflect the conversion.
Our guide on how to allot and transfer shares in a Singapore company walks through the mechanics.
Tax Treatment Under IRAS
Interest on convertible notes: Generally deductible for the company if incurred to produce income; taxable for the investor as interest income under Section 10(1)(d) ITA.
Withholding tax: If the convertible note investor is a non-resident, interest payments are subject to 15% withholding tax under Section 45. This applies to accrued interest converted into shares as well — a common trap. See our withholding tax guide.
Stamp duty on conversion: Allotment of new shares (as opposed to transfer) is not subject to stamp duty. Conversion is therefore stamp-duty-neutral.
Section 45B: Convertible SAFEs and notes that involve foreign investors may fall within Section 45B, which requires withholding on gains from disposal of shares in a Singapore company by certain non-resident related parties.
Common Pitfalls
Over-issuing convertibles. Founders sometimes raise too much via convertibles at low caps. When Series A arrives and everything converts, the founder’s stake can drop far below what they expected. Model dilution before signing.
Ignoring the interest calculation. A convertible note issued at S$500,000 with 6% interest and a 24-month term will have accrued S$60,000 in interest by conversion — 12% more shares than the principal alone would buy. Multiple this over five notes and the founder dilution grows quickly.
Prospectus exemption failures. Issuing SAFEs to 60 accredited-friends-and-family may still fall foul of the Section 275 SFA exemption if some are not accredited. Keep the count at 50 or fewer where possible.
Missing the debenture register. Convertible notes are debentures. Skipping the register creates a compliance breach that surfaces embarrassingly during a Series A due diligence.
SAFE stacking without cap discipline. Multiple SAFEs at different caps and discounts, combined with pro-rata rights, can produce cap tables no one understands. A clean audit trail matters.
When to Choose Which
Choose a convertible note when: the investor wants downside protection (repayment on failure to convert); the round is larger than S$1 million; there is a clear maturity horizon; or when a strategic investor demands debt-like protection.
Choose a SAFE when: the round is small (under S$500,000); speed matters more than structure; the investors are pure angels; the founders want to avoid a debt line on the balance sheet; or the runway is uncertain.
For rounds in the S$500,000 to S$2 million range, both instruments are common — the answer often depends on which the lead investor is more comfortable with.
How Raffles Corporate Services Helps
We handle the full corporate secretarial workflow for Singapore startups issuing convertibles: drafting board resolutions and shareholder consents, maintaining the debenture register, filing with ACRA on conversion, and coordinating with your tax adviser on interest deductibility and withholding. For startups with sophisticated cap tables, we also work alongside ESOP administration and share allotment/transfer operations so the corporate record stays clean through every conversion, exercise and secondary sale. See our guide to bespoke company constitutions for the drafting issues around share classes that convertibles typically create.
— The Editorial Team, Raffles Corporate Services