SAFEs in the UK

Convertible instruments, particularly Advance Subscription Agreements (ASAs) and Convertible Loan Notes (CLNs), have long been part of the UK venture capital scene. They are typically shorter and simpler than the usual full suite of investment documentation and are often used for quick initial funding at the startup stage, to bridge companies between equity rounds, or to avoid a priced round where there are pressures or potential misalignments between the company and investors on valuation.

Increasingly though, founders and investors are using SAFEs (Simple Agreements for Future Equity), a US import popularised by Y Combinator. Their appeal lies in their simplicity and the familiarity they offer to many US-based investors.

Why SAFEs?

SAFEs were designed by Y Combinator to give investors a quick, standardised way to invest without the complexities of a priced round. In their US form, SAFEs usually hinge on just two negotiated points:

• the investment amount; and
• the post-money valuation cap (the maximum valuation at which the SAFE converts).

This makes them easy to understand — investors know exactly what percentage their investment will buy (e.g. £1m investment on a £10m post-money cap = 10%), and founders can calculate dilution more precisely upfront, something that was harder with the older pre-money SAFEs (because none of the SAFE money is counted in the pre-money valuation and each new SAFE dilutes earlier SAFEs). Some forms of SAFE include a discount to a future round price, or use pre-money valuation caps.

How they differ from CLNs and ASAs

CLNs are quasi-debt instruments. They accrue interest, usually have a maturity date, and may be repayable on insolvency or default. The key drawback is that they are not SEIS/EIS compatible, since capital at risk is a core requirement. This often pushes UK angel investors towards ASAs instead.

ASAs are not debt instruments but prepayments for shares. They can qualify for SEIS/EIS relief provided they meet strict conditions: no repayment rights, no interest, and a longstop of no more than six months. They are short-form and relatively simple, but those same tax rules restrict flexibility.

SAFEs sit somewhere in between. They are not debt, but often include cash-out rights in an exit or insolvency, which can conflict with HMRC's definition of "capital at risk". In practice, that means SAFEs do not qualify for SEIS/EIS relief. For early-stage UK investors, that is usually a deal-breaker. From a UK legal perspective, consideration should also be given to ensure SAFEs are not characterised as debt under the Companies Act 2006. For example, the inclusion of certain rights (such as repayment rights on insolvency) can trigger debt classification, with balance sheet implications.

Are SAFEs catching on?

SAFEs have become the default seed instrument in the US, but adoption in the UK has been slower. Where investors do not require SEIS or EIS relief, such as corporate venture arms or international funds, they can work well. However, for angel-heavy UK seed rounds, ASAs remain the preferred structure. That said, more UK companies raising from US investors are now using SAFEs, particularly in cross-border rounds where US investors prefer familiar documentation. 

Overall, SAFEs offer speed and simplicity but are not always appropriate in the UK, particularly given tax considerations. For most domestic seed rounds, ASAs remain the preferred route, with CLNs still relevant where investors want downside protection. As US capital continues to flow into UK startups, SAFEs will likely become even more common, but founders should understand their limitations as well as their benefits and the nuances that can materially affect dilution and future fundraising flexibility.