Equity vs Convertible Loan Notes vs SAFEs: Which to Use in the UK

If you are raising your first or second round in the UK, the document you sign matters as much as the amount you raise. The choice between a priced equity round, a convertible loan note (CLN), a SAFE, or an advance subscription agreement (ASA) affects how fast you close, how much you spend on lawyers, how much you dilute, and, decisively in Britain, whether your investors keep their SEIS and EIS tax relief.

That last point is where UK founders trip up. A structure that is standard in San Francisco can quietly cost your angels half their investment back in tax relief here. This guide walks through how each instrument works and which suits pre-seed versus seed, with the HMRC rules verified against current gov.uk guidance.

The four instruments in plain terms

There are really four options on the table for an early UK company, and they split into two families: priced rounds, where you sell shares now at an agreed valuation, and convertibles, where you take money now and issue shares later.

Priced equity round

You agree a valuation, issue shares immediately, and the investor becomes a shareholder on completion. This needs a shareholders’ agreement and articles of association, a cap table update, and Companies Act filings (an SH01 for the allotment). It is the most work and the most certain: everyone knows exactly what they own the day the money lands.

Convertible loan note (CLN)

A CLN is debt. The investor lends the company money that converts into shares at a later event, usually your next qualifying funding round. It typically carries interest, has a maturity (long-stop) date, and gives the investor either conversion or repayment. Founders use CLNs to delay setting a valuation, often rewarding the investor with a discount to the next round’s price, a valuation cap, or both.

SAFE (simple agreement for future equity)

A SAFE, popularised by Y Combinator, is a contractual right to shares in a future priced round. Crucially it is not a loan: there is no interest, no maturity date, and no repayment obligation. It converts on the next equity round, again often with a discount or a cap. It is short, cheap, and quick, which is why it spread worldwide.

Advance subscription agreement (ASA)

The ASA is the British answer to the SAFE. The investor pays now for shares to be issued on a future event, but the money is a payment for shares from day one, not a loan. As long as it is drafted to HMRC’s standards, the shares issued on conversion can qualify for SEIS or EIS. SeedLegals markets its version as a SeedFAST; the underlying instrument is an ASA.

Discount, valuation cap and conversion triggers

CLNs, SAFEs and ASAs all defer the valuation question, so they use the same levers to price the deferred shares fairly.

Discount. Early money converts at a percentage below the next round’s price, commonly 10 to 25 per cent, rewarding the investor for backing you sooner.
Valuation cap. A ceiling on the valuation at which the investment converts. If you raise your next round at a higher valuation than the cap, the early investor converts at the lower cap price and gets more shares.
Conversion trigger. Usually the next qualifying priced round above an agreed size. Secondary triggers commonly include a sale of the company (often with a payout multiple) and a long-stop date.

What differs is what happens at the long-stop. On a CLN, if no round happens by maturity, the note can fall due for repayment, or convert at a fallback valuation; the investor is a creditor. On a SAFE there is no maturity, so nothing forces conversion or repayment, which favours the founder. On an ASA, the long-stop must trigger conversion into shares, because the money can never be repaid (more on that below).

The SEIS and EIS angle that decides it in the UK

This is the section that should drive your decision. SEIS and EIS give your investors generous income tax relief: 50 per cent for SEIS and 30 per cent for EIS, per HMRC’s guidance for investors. For most UK angels that relief is not a nice-to-have, it is the reason they are investing in a loss-making startup at all. Pick the wrong instrument and you take it away from them.

A calculator and paperwork on a desk representing UK SEIS and EIS tax relief calculations — SEIS and EIS relief often decides which funding instrument a UK startup can use.

Convertible loan notes do not qualify for SEIS or EIS. The reliefs apply to ordinary shares subscribed for in cash. A CLN is a loan that converts, and HMRC does not allow relief on shares issued on the conversion of a debt. So a standard interest-bearing CLN with repayment rights is incompatible with both schemes.

Priced equity qualifies straightforwardly, because the investor subscribes for shares in cash at completion. This is the cleanest route to SEIS and EIS, assuming the company and shares meet the conditions.

ASAs can qualify, if drafted to HMRC’s requirements. HMRC’s published view is that an ASA is only suitable for SEIS or EIS where the agreement: cannot result in the subscription money being refunded under any circumstances; cannot be varied, cancelled or assigned; carries no interest; and has a long-stop date that HMRC expects to be no more than six months from the date of the agreement. Miss any of these, especially a long-stop beyond six months or any whiff of a refund or interest, and the shares can fail the test.

SAFEs are the awkward case. A vanilla US SAFE was not written with HMRC in mind and can include features (notably an open-ended timeline, or terms that look like a refundable advance) that put SEIS and EIS at risk. A SAFE that is redrafted to mirror the ASA conditions above effectively becomes an ASA. The safe assumption for a UK company is: if you need the tax relief, use a properly drafted ASA rather than an off-the-shelf SAFE.

One practical point on timing: the company conditions are tested when the shares are actually issued, not when you sign the ASA. For SEIS the company must have gross assets of no more than £350,000 and fewer than 25 full-time-equivalent employees when the shares are issued, and can raise up to £250,000 in total under SEIS. The short long-stop matters here too, because a company can outgrow the SEIS limits in a year.

Cost, speed and legal effort

The instruments line up roughly from quickest to slowest: SAFE and ASA, then CLN, then priced equity.

SAFE or ASA: short standard-form documents, often a single agreement per investor, no new articles required. Days, not weeks, and modest legal cost. Good when you want to bank money quickly between rounds.
CLN: a loan instrument plus a subscription mechanic; more negotiation around interest, maturity and conversion terms, and you may need board or shareholder approvals. More cost than a SAFE, less than a full round.
Priced equity: term sheet, shareholders’ agreement, amended articles, disclosure, board and shareholder resolutions, share issue and Companies House filings. Weeks of legal work and the highest fees, but full certainty.

Dilution and control

In a priced round, dilution is known on day one: you sell a defined percentage at a defined price. With convertibles, dilution is deferred and can be larger than founders expect, because discounts and caps both hand the early investor more shares than their headline cash would suggest. Stacking several SAFEs or notes with different caps before a priced round is the classic way founders end up far more diluted than they modelled.

Control differs too. A CLN holder is a creditor until conversion and can have rights on insolvency or at maturity. SAFE and ASA holders are generally not creditors and not yet shareholders, so they usually have fewer rights until conversion. A priced-round investor is a shareholder immediately, often with board or veto rights set out in the shareholders’ agreement.

So which should you use?

For a UK company, work backwards from SEIS and EIS, then from speed.

Pre-seed, raising from angels who want SEIS: a priced SEIS round if you can agree a valuation, or a well-drafted ASA if you want to move fast and convert into the priced round within six months. Avoid a CLN here; it would cost angels their relief.
Bridging between rounds, money needed now: an ASA is usually the cleanest UK tool because it banks cash quickly and keeps SEIS or EIS alive, provided you genuinely expect a round inside six months.
Seed and beyond, larger cheques, investors comfortable without relief or seeking downside protection: a priced equity round for certainty, or a CLN where investors specifically want interest and repayment rights and are not relying on SEIS or EIS.
Founders importing a US SAFE: have it reviewed and, if tax relief matters, converted to a compliant ASA before signing.

None of this is tax or legal advice; the schemes have detailed company and share conditions, and HMRC’s advance assurance process exists precisely so you can check before you issue shares. For more on building and funding a company in Britain, see idea-london.co.uk, and confirm the current scheme conditions on HMRC’s venture capital schemes guidance and the Seed Enterprise Investment Scheme background page.

Frequently asked questions

Do convertible loan notes qualify for SEIS or EIS in the UK?

No. SEIS and EIS relief applies to ordinary shares subscribed for in cash, and HMRC does not allow relief on shares issued on the conversion of a loan. A standard interest-bearing CLN with repayment rights is therefore incompatible with both schemes. If your investors need the relief, use a priced share issue or a compliant ASA instead.

What makes an ASA qualify for SEIS or EIS?

HMRC’s published position is that the agreement must not allow the subscription money to be refunded under any circumstances, must not be capable of being varied, cancelled or assigned, must carry no interest, and should have a long-stop date no more than six months from the date of the agreement. The company and share conditions must also be met when the shares are actually issued, not when you sign.

Is a SAFE the same as an ASA?

They are similar in spirit, but a standard US SAFE is not written to HMRC’s rules and can include features, such as an open-ended timeline, that jeopardise SEIS and EIS. An ASA is the UK instrument designed to be tax-relief compatible. A SAFE redrafted to meet the ASA conditions effectively becomes an ASA.

What is the difference between a discount and a valuation cap?

A discount converts your early money at a set percentage below the next round’s price, rewarding the investor for going in early. A valuation cap sets a maximum valuation at which the money converts, so if your next round is priced higher than the cap, the early investor still converts at the lower cap price and receives more shares. Many convertibles use both, with the investor getting whichever is more favourable.

How much can a company raise under SEIS?

A company can raise up to £250,000 in total under SEIS. To qualify when the shares are issued it must have gross assets of no more than £350,000 and fewer than 25 full-time-equivalent employees, among other conditions. Investors can claim 50 per cent income tax relief on SEIS investments up to an annual limit of £200,000.

Why do founders end up more diluted with convertibles than they expect?

Because discounts and caps both hand early investors extra shares relative to their headline cash, and the effect compounds when several SAFEs or notes with different caps convert at once in a later priced round. Modelling the fully converted cap table before signing, not just the cash raised, avoids the surprise.