Convertible notes and SAFEs explained for UK founders

Raising money without naming a price

At pre-seed, you hit a chicken-and-egg problem. To sell shares, you need to agree what the company is worth. But your company is six months old with a half-built product — nobody, including you, knows what it's worth. Haggling over a valuation now wastes weeks and risks setting a number you'll regret.

So founders use a clever workaround: instruments that let an investor hand over cash now and convert it into shares later, at the next proper funding round, when there's a real valuation to work from. The investor gets in early and gets rewarded for the risk; you get the cash without a painful valuation fight today.

The three you'll meet in the UK are SAFEs, convertible loan notes, and advance subscription agreements (ASAs). They sound interchangeable. They're not — and the differences have real UK tax consequences. Here's the plain-English map.

A note before we start: this article explains the concepts so you can hold a confident conversation. It is not legal or tax advice. These instruments interact with company law and with SEIS/EIS rules that change, and the wrong structure can cost you valuable tax relief for your investors. Always have a solicitor draft or review the document, and always confirm the current SEIS/EIS position with your accountant or HMRC before you rely on it.

The SAFE: a promise of future shares

A SAFE — Simple Agreement for Future Equity — was invented by the US accelerator Y Combinator. It's the leanest of the three. The investor gives you money today in exchange for a promise: when you next raise a priced round, that money converts into shares.

The key thing about a SAFE: it is not a loan. There's no interest, no repayment date, no debt sitting on your balance sheet. It just waits until the next round, then turns into equity. That simplicity is why it spread.

A SAFE usually carries one or both of these sweeteners for the early investor:

• A discount. The investor's money converts at a reduction to the next round's price — say 20% off. They took the early risk, so they get more shares per pound than the later investors.
• A valuation cap. A maximum valuation at which their money converts, no matter how high the next round is priced. If they came in on a £4m cap and you later raise at £10m, they still convert as if the company were worth £4m — so their early bet pays off handsomely.

The convertible loan note: a loan that turns into shares

A convertible loan note (often "convertible note," or "convertible loan note UK") does a similar job but starts life as actual debt. The investor lends you money. It accrues interest. It has a maturity date — a deadline by which it either converts into shares or has to be repaid.

Like a SAFE, it usually has a discount and/or a valuation cap. The differences that matter to you:

• It's a debt until it converts. It sits on your balance sheet as a liability, and the interest (often "rolled up" rather than paid in cash) increases the amount that eventually converts into shares.
• The maturity date has teeth. If you haven't raised a qualifying round by then, the note technically becomes repayable. In practice it's usually extended or converted by agreement — but it's a real obligation, not a soft promise.

Convertible notes were the UK default for years and are still common. SAFEs have grown popular here too, but — and this is the crucial UK bit — neither was designed with British tax relief in mind.

How conversion actually works (the worked bit)

Both instruments convert at your next priced round. Here's the mechanic, kept simple.

Say an angel puts in £50,000 on a SAFE with a 20% discount and a £4m valuation cap. A year later you raise a seed round at a £6m pre-money valuation.

• The round price is based on £6m. But the angel has a £4m cap, which is lower — so they convert at the £4m valuation (the cap wins because it gives them more shares).
• Their £50k buys shares as if the company were worth £4m, not £6m. They get a meaningfully bigger slice than a brand-new £50k investor in the same round.

The discount and the cap both exist to reward the early money. When the cap is lower than the discounted round price, the cap usually applies; otherwise the discount does. Your investor gets whichever is better for them — and your cap table absorbs the extra shares as dilution to everyone already on it. (See: Dilution: what happens to your ownership when you raise and Pre-money vs post-money valuation explained simply.)

The practical warning: stacked SAFEs surprise founders. Raise £50k here, £100k there, £75k somewhere else, all on different caps, and when they all convert at once the combined dilution can be far larger than you pictured. Model the conversion before you sign each one, not after they all land in the same round.

The UK reality: ASAs, and why SEIS/EIS changes everything

Here's the gap most US-written guides miss, and it's the single most important thing for a UK founder to know.

The reason your early investors are writing cheques at all is often SEIS and EIS — the UK schemes that give individual investors generous income tax relief (and capital gains advantages) for backing early-stage companies. For many angels, no SEIS/EIS means no deal. So you cannot treat it as a footnote.

And here's the problem: a standard convertible loan note generally does not qualify for SEIS/EIS, because the schemes require investment in shares, and a note is debt until it converts. A SAFE sits in a grey, untested area under UK law and tax practice. Either can quietly blow up your investors' relief if structured carelessly.

The UK answer is usually the advance subscription agreement (ASA). An ASA is a payment in advance for shares — not a loan — designed so that it can be compatible with SEIS/EIS. HMRC has expected ASAs to meet conditions such as: no interest, no repayment to the investor (the money must convert into shares, it can't come back as cash), and a longstop date by which conversion must happen — historically guided to be no more than around six months out. Get those conditions wrong and the relief can be lost.

The honest summary for a UK pre-seed founder:

• If your investors need SEIS/EIS — and most angels do — an ASA is usually the safer route than a SAFE or a convertible note.
• A convertible loan note is fine when the investor isn't relying on SEIS/EIS, or for non-individual investors (like funds) where the schemes don't apply.
• The exact conditions, time limits and qualifying rules change over time and have edge cases. Do not lift a US SAFE template off the internet and assume it works here.

This is genuinely a "phone a professional" decision. Have a startup solicitor draft the instrument and confirm the SEIS/EIS treatment with your accountant or HMRC before any money moves. The cost of getting advice is trivial next to the cost of an angel losing their tax relief because of how you papered a £50k cheque.

What investors read into how you handle this

An angel writing you a SEIS cheque is trusting you with their tax position, not just their cash. When you can explain, calmly, "we're using an ASA so your SEIS relief is protected, here's the cap and the longstop date, and our solicitor has drafted it" — you've told them you take their money seriously. When you wave a US SAFE template at a UK angel and shrug about SEIS, you've told them the opposite.

You don't need to be the expert. You need to know enough to ask the right questions, instruct the right professionals, and keep a clean record of every instrument you've issued so that when they all convert, there are no nasty surprises on the cap table. (See: What is a cap table and how do I keep mine clean?)

The short version

SAFEs and convertible loan notes let you raise now and set the valuation later — the money converts into shares at your next priced round, usually with a discount and/or a valuation cap to reward the early risk. A SAFE is a promise of future equity; a convertible note is a loan that converts. But in the UK, both can jeopardise the SEIS/EIS relief your angels are counting on, which is why the advance subscription agreement (ASA) is often the right tool here. Model every conversion before you sign, keep clean records — and take proper legal and tax advice, because the SEIS/EIS rules are detailed and they change.

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Taking early money? In Ledgers, every SAFE, note and ASA you issue is tracked against your cap table — so when they all convert at your next round, you see the real dilution in advance, and your SEIS3/EIS3 paperwork and DD-ready exports are ready when investors ask. Keep your instruments and cap table clean → start free.

This is not legal or tax advice — always have a solicitor draft your instrument and confirm the SEIS/EIS position before you rely on it.

Next, what conversion does to your stake: Dilution — what happens to your ownership when you raise →

And the view it all feeds into: What is a cap table and how do I keep mine clean? →

Frequently asked questions

What is a SAFE note?

A SAFE (Simple Agreement for Future Equity) is an agreement where an investor gives you money now in exchange for shares later, converting at your next priced round — usually with a discount and/or valuation cap. It's not a loan: there's no interest or repayment date.

What's the difference between a SAFE and a convertible loan note?

A SAFE is a promise of future shares with no debt attached. A convertible loan note is an actual loan — it accrues interest and has a maturity date — that converts into shares at the next round. Both reward early investors with a discount or cap.

Do SAFEs and convertible notes qualify for SEIS/EIS in the UK?

Often not as drafted. SEIS/EIS generally require investment in shares, so a convertible loan note (which is debt until conversion) typically doesn't qualify, and a SAFE is untested under UK rules. UK founders usually use an advance subscription agreement (ASA) instead. Always confirm with a professional, as the rules change.

What is an advance subscription agreement (ASA)?

An ASA is an advance payment for shares — not a loan — structured to be compatible with SEIS/EIS. HMRC has expected conditions such as no interest, no repayment of cash to the investor, and a longstop date for conversion (historically guided at around six months). Have a solicitor draft it and confirm current rules.

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