Seed round revolution: how SAFEs are edging out convertible notes and priced rounds

Two years ago most UK founders raised their first‑money‑in with a quick Advance Subscription Agreement (ASA) or a Convertible Loan Note (CLN). Today the default request from many early investors is a SAFE — the two‑page “Simple Agreement for Future Equity” that Y Combinator popularised in California a decade ago.

Carta’s latest platform numbers show SAFEs now account for roughly 85 percent of sub‑$1 million Angel rounds, more than half of all rounds under $3M, and a quarter of $5 million‑plus Seed rounds. These are remarkable statistics. As investors increasingly import those habits across the Atlantic, UK founders need to know where the US boiler‑plate fits – and where it definitely doesn’t.

What follows is a plain‑English walk‑through: how SAFEs overtook convertibles in the States, why ASAs remain the UK’s tax‑friendly cousin, where dilution hides and a founder‑level checklist for choosing the right instrument.

1. From Valley hack to global default

In 2013 YC’s lawyers released the original SAFE as a faster, cheaper alternative to the convertible loan note or CLN. The idea was elegant: strip out interest, maturity and legalese so Seed cheques could close in days, not weeks or months.

The instrument exploded during the 2020‑22 boom, and Carta’s internal dataset — 55,000‑plus pre‑priced financings — now paints a clear picture: in the US SAFEs write virtually every Pre‑Seed cheque and have penetrated well into “large seed” territory. Investors tolerate the lighter rights because speed to allocation trumps structure when the target company needs urgent cash and valuation is still a big unknown.

2. What a SAFE really is (and isn’t)

No maturity, no coupon, no board rights. A SAFE is not debt; it is a contractual promise that the investor will receive shares only when the company next sells priced equity, is acquired or lists. Most SAFEs now use YC’s post‑money template, meaning the dilution from that instrument is fixed the moment you sign, not when you raise.

Carta’s latest cut of the dataset shows just over 80 percent of SAFEs are issued on the post‑money template, and about nine in ten include a valuation cap (roughly one‑third also add a discount).

The absence of a maturity date means there is no legal clock forcing a conversion. Great for founders who need breathing space; frustrating for investors if the priced round never comes!

3. Convertible notes – familiar but increasingly rare

Convertible loan notes dominated UK bridge financings pre‑2019. They behave like short‑term debt: the note accrues interest (typically 6–8 percent), matures in 18–24 months and either repays in cash or converts at the next round with a discount or cap.

The structure offers downside protection for the investor, but the debt label collides with HMRC’s venture‑tax rules. Interest, redemption rights and security all risk disqualifying the investment from the Seed or Enterprise Investment Schemes.

In practice, that tax penalty has pushed many UK Angels and early stage funds towards a different compromise.

4. The UK twist — ASAs and SeedFASTs

HMRC’s guidance says an investment must be equity (or at least look like unavoidable equity) to unlock SEIS/EIS relief. Enter the Advance Subscription Agreement — sometimes branded SeedFAST on SeedLegals — a UK‑law cousin of the SAFE. Like a SAFE it carries no interest, no redemption right and no valuation today. Unlike a SAFE it must satisfy one clear expectation for the relief to stick: HMRC guidance says the shares paid for under an ASA should be issued within six months of the money hitting the company’s bank account. Founders occasionally run longer long‑stops and still secure relief, but HMRC reserves the right to refuse.

Key takeaways for founders:

• Mark the six‑month calendar the moment the ASA is signed; miss it and your investor’s tax benefit may disappear.
• Make the long‑stop realistic; if you doubt you can run a priced Seed inside six months, lower the target raise or skip the relief altogether.
• Spell out the discount or cap; HMRC is agnostic on valuation language, but investors will expect a post‑money cap to mirror US norms.

5. Dilution danger – why stacked SAFEs bite later

Because each SAFE fixes a post‑money valuation on signature day, stacking two or three in quick succession without re‑pricing the cap table is a common pitfall. A stylised (but real) example:
Round 1: £1 million SAFE at a £5 million post‑money cap (investor claims 20 percent).
Round 2: £2 million SAFE at a £10 million post‑money cap (another 20 percent).
Series A: £6 million new cash at a £24 million pre‑money valuation.

When that Series A finally prices, the two SAFEs convert first and together own about 29 percent of the company, leaving founders on roughly 51 percent. By contrast, if the first £1 million had been a priced Seed at £5 million pre‑money (and the £2 million followed at the higher valuation) founders would part with around 24 percent at the same Series A. That five‑point swing at Seed sets a precedent that compounds through every later round and option‑pool top‑up.

Rule of thumb: if you need more than one SAFE or ASA before a priced round, track dilution in a live cap‑table tool and share it with every new investor.

6. Why investors love – and sometimes hate – SAFEs

Love factors

• Speed: after light diligence and once the SAFE or ASA (plus any side‑letter) is signed, funds can arrive within a few days - no separate subscription agreement is normally needed. By contrast, a CLN almost always comes with a Loan Note Instrument, a Subscription or Loan Agreement, and board resolutions, so closing typically stretches to several weeks.
• No board obligations: Angels and other investors avoid fiduciary duties they don’t want.
• Clear dilution with the post‑money template: easier to model than a convertible note.

Hate factors

• No information rights by default. Fix: add a two‑line side‑letter giving quarterly metrics for example.
• Risk of perpetual limbo if a priced round never happens. Fix: insert a conversion on long‑stop date clause.
• No liquidation preference. Fix: step up to a priced round if investors need down‑side cover (or add a side‑letter that says the SAFE will convert into the most senior share class issued in the next priced round so they don’t fall behind);

Most objections are solvable in a short side‑letter; include one and SAFEs stay founder‑friendly without alienating sophisticated money.

7. Founder playbook 2025 – choosing the right instrument

1. Pick a SAFE or ASA when
   • you’re closing an interim round (e.g., a bridge between Pre‑Seed and Seed or a top‑up between Seed and Series A) and speed trumps everything else;
   • valuation is still finger‑in‑the‑air but should clarify within a year;
   • investors don’t need voting rights or board seats
   • for UK Angels and institutional investors chasing SEIS/EIS relief, wrap it as an ASA/SeedFAST so the tax benefit survives.
     
2. Pick a convertible loan note when
   • an investor – Angel, Family Office or institutional fund – insists on debt‑like downside protection through interest and a maturity date;
   • no SEIS/EIS relief is on the table;
   • you want the option to repay (rare, but sometimes strategic).
     
3. Go straight to a priced round when
   • you’re raising in the multi‑million range and at least one of the factors below applies;
   • multiple investors are bidding so legal fees can be amortised;
   • you need preference shares for a lead or to tidy stacked convertibles;
   • you’re ready for a formal board and a clean option pool.

Bonus hygiene tips

• Information rights: offer a brief side‑letter with quarterly metrics if investors ask for it; otherwise keep reporting light to preserve founder bandwidth. Keeping investors in the loop is always good practice.
• Dilution tracker: update it every time you sign a new instrument; transparency keeps everyone calm.
• Bridge timing: if SEIS/EIS is in play, work backwards from the six‑month share‑issue rule.

Final thought

SAFEs have earned their place in the UK fundraising stack, but they are a scalpel, not a Swiss‑army knife. Use them for speed, layer them sparingly and flip into a priced round before your cap‑table turns opaque.

If SEIS/EIS relief is on the agenda, reach for an ASA and set a realistic six‑month conversion date.

Master those nuances and you’ll land capital faster than the competition without sacrificing future ownership.

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