When a Singapore startup raises its first outside money, founders often hear two terms almost immediately: the convertible note and the SAFE. This convertible note SAFE Singapore guide explains how each instrument works, what valuation caps and discounts actually do to your cap table, and what happens when the money finally converts into shares.
It is not a survey of where to find money. If you are still working out whether you need angels, accelerators, grants or venture capital, start with our overview of raising capital for your startup. This article assumes an investor is interested and you are deciding how to paper the deal.
This is general information, not legal or financial advice. Fundraising documents have real long-term consequences, so have a Singapore-qualified corporate lawyer review any term sheet before you sign.
Why Early Startups Use Convertible Instruments
A priced equity round requires everyone to agree on what the company is worth today. For a pre-revenue startup, that number is mostly guesswork, and negotiating it can take weeks of legal work.
Convertible instruments solve this by postponing the valuation question. The investor hands over money now. In exchange, they get the right to receive shares later, usually when the company raises a proper priced round. The price they pay at that point is set by formulas agreed upfront, which reward them for investing early.
The main advantages for founders:
- Speed: documents are short and fairly standardised, so you can close individual investors on a rolling basis.
- Lower legal cost compared with a full share subscription and shareholders’ agreement.
- No board seat or detailed investor rights at this stage, in most standard forms.
The trade-off is that dilution is hidden until conversion. Founders who stack several notes or SAFEs without modelling the outcome can be surprised by how much of the company they have given away.
How a Convertible Note Works
A convertible note is a loan that is designed to turn into equity. It typically has:
- Principal: the amount invested.
- Interest: accrues on the principal, and is usually converted into shares along with it rather than paid in cash.
- Maturity date: a deadline, often 12 to 24 months out. If no qualifying round has happened by then, the note’s terms decide what happens: extension, conversion at a set price, or in some cases repayment.
- Qualifying financing: the size or type of round that triggers automatic conversion.
Because it is debt, a convertible note sits on your balance sheet as a liability until it converts. That can matter if the business struggles, since noteholders could in theory demand repayment at maturity. Most early investors prefer to extend or convert, but read the maturity clause carefully.
How a SAFE Works
SAFE stands for Simple Agreement for Future Equity. The format was popularised by the US accelerator Y Combinator and has since been adapted for many jurisdictions, including Singapore, by law firms and industry groups.
A SAFE is not a loan. It has no interest and usually no maturity date. The investor pays money now for a contractual right to receive shares when a defined event happens, such as a priced round, a sale of the company or a dissolution.
For founders, this is simpler and lighter than a note. For investors, it carries more risk, because there is no repayment deadline to fall back on. Singapore investors are generally familiar with SAFEs, but some prefer notes, and local adaptations differ from the US template. Do not assume a downloaded US SAFE works under Singapore company law without review.
Convertible Note vs SAFE: Key Differences
| Feature | Convertible note | SAFE |
|---|---|---|
| Legal nature | Debt that converts into equity | Contractual right to future equity, not debt |
| Interest | Usually yes, often converted into shares | None |
| Maturity date | Yes, with terms for what happens if unconverted | Usually none |
| Balance sheet | Liability until converted | Treatment depends on terms; ask your accountant |
| Investor protection | Stronger, due to repayment and maturity rights | Weaker, relies on a future event |
| Typical use | Bridge rounds, investors wanting more protection | Pre-seed and seed rounds with simple terms |
Valuation Caps and Discounts Explained
These two terms decide how many shares an early investor actually gets. They apply to both notes and SAFEs.
Valuation cap. This sets the maximum company valuation at which the investment converts. If your priced round values the company above the cap, the early investor converts as if the valuation were the cap, so they get more shares per dollar than new investors.
Discount. This gives the early investor a percentage off the price per share paid by new investors in the priced round.
Many instruments include both, and the investor converts at whichever gives them the better price. A simple illustration with made-up numbers:
- An angel invests $100,000 on a SAFE with a cap of $5 million and a 20% discount.
- A year later, a venture fund invests at a pre-money valuation of $10 million, paying $1.00 per share.
- With the discount, the angel’s price would be $0.80 per share.
- With the cap, the angel’s price would be roughly $0.50 per share, because $5 million is half of $10 million.
- The cap gives the better price, so the angel converts at about $0.50 and receives roughly 200,000 shares, while the new fund gets 100,000 shares for the same amount.
Real calculations also depend on whether the cap is measured pre-money or post-money, what counts in the share count (for example, an employee share option pool) and any interest on a note. Build a cap table model in a spreadsheet and run several scenarios before signing.
Pre-Money vs Post-Money Caps
This detail catches many founders out.
- Pre-money caps calculate the investor’s ownership before the new money and other convertibles are added. If you raise several SAFEs, each one dilutes everyone, including the founders, in ways that are hard to predict.
- Post-money caps fix the investor’s ownership percentage at conversion. A $500,000 investment on a $5 million post-money cap means that investor gets roughly 10% at conversion, regardless of other SAFEs. This is clearer for investors and makes founder dilution easier to calculate, but all of that dilution falls on existing shareholders.
Neither is automatically better. What matters is that you understand which one you are signing and model the total dilution from every instrument you have issued.
What Happens at Conversion in Singapore
When the trigger event arrives, the company issues new shares to the note or SAFE holders. Under Singapore’s Companies Act, issuing shares usually needs proper approval from directors and, depending on your constitution, shareholders. The company must then lodge the share allotment with ACRA (the Accounting and Corporate Regulatory Authority) through Bizfile, its online filing portal, within the required timeframe, and update its electronic register of members.
Practical steps to plan for:
- Check your constitution for pre-emption rights, which may require offering new shares to existing shareholders first, and get the necessary waivers.
- Keep a clean record of every instrument, its cap, discount and amount.
- Coordinate with the lead investor’s lawyers in the priced round, who will want all convertibles settled cleanly.
- Ask a tax adviser about any tax treatment of the instrument and conversion, and confirm details with IRAS.
Questions to Ask Before You Sign
- What is the cap, and is it pre-money or post-money?
- Is there a discount, and does the investor get the better of cap or discount?
- For a note: what is the interest rate, maturity date and what happens at maturity?
- Is there a most favoured nation clause that lets this investor adopt better terms you give later?
- Are there pro rata rights to invest in future rounds?
- What counts as a qualifying financing, and what happens if the company is sold first?
Once your instruments are in place, government support can stretch the runway further. See our guide to government grants for startups and SMEs, and if you are a foreign founder, check the EntrePass for startup founders for how to base yourself here.
Frequently Asked Questions
Should a first-time founder choose a convertible note or a SAFE? SAFEs are lighter, with no interest or maturity date, which suits many early rounds, while notes give investors more protection and may suit investors who want a repayment backstop. The choice depends on your investors, round size and plans. Take advice from a Singapore corporate lawyer before choosing.
What happens to a note or SAFE if the startup fails before it converts? Holders usually rank behind creditors, and a SAFE holder is not owed repayment, so they may recover little or nothing. A note is debt, so holders could be creditors with a claim on the company. The exact result depends on the terms and insolvency law, so seek legal advice.
How many SAFEs or notes are too many? There is no fixed number, but stacking many without modelling the effect can leave founders with far less equity than expected once everything converts. Build a cap table model after each new instrument, and compare the total dilution against the round size you plan.
Can overseas angels invest through a Singapore SAFE? Often yes, since private investors from many countries invest in Singapore startups through these instruments. Check currency, tax and any investor-side rules with advisers, and note that offers of securities can be regulated. Have the documents adapted to Singapore law rather than using a US template unchanged.
How does an employee option pool affect conversion? Whether the option pool counts in the share count used at conversion changes the price investors get and the dilution that founders take. Many documents specify how the pool is treated. Read that clause closely and run scenarios in your cap table before signing.