Quick answer: SAFE or convertible note?
For a very early, pre-seed or seed Hong Kong startup that wants a fast, low-cost raise and no debt on the balance sheet, a SAFE is usually the cleaner choice. For a startup with some traction, or an investor who wants the protection of interest and a maturity date, a convertible note is often more appropriate. Both defer the valuation question to a later priced round — the real difference is debt versus a non-debt right to future equity.
Need help deciding? TITUS advises founders on both — see our startup investment practice.
What is a SAFE and what is a convertible note?
A SAFE (Simple Agreement for Future Equity) is an investment contract that gives the investor the right to receive shares in the future on a triggering event, typically the next qualifying equity round or a liquidity event. A SAFE is not a loan: it carries no interest and no maturity date, and it does not sit on the balance sheet as debt. Our deep-dive explains the mechanics in SAFE: everything you need to know.
A convertible note (or convertible loan note) is short-term debt that converts into equity at a future round. It usually carries an interest rate and a maturity date; if it has not converted by maturity, it may need to be repaid or renegotiated. See our overview, What is a convertible note?.
Both instruments commonly use a valuation cap (a ceiling on the conversion valuation) and/or a discount (a reduction on the price new investors pay), so the early investor is rewarded for backing the company sooner.
How do SAFEs and convertible notes actually differ?
The core differences come down to four things.
1. Debt or not. A convertible note is a debt instrument: it creates a repayment obligation and usually accrues interest. A SAFE is not debt; nothing is “owed” unless and until it converts.
2. Interest and maturity. Convertible notes typically carry interest (often a single-digit annual rate) and a maturity date. SAFEs have neither, which is why founders often prefer them. In Hong Kong, it is common to see convertible loan notes that are interest-free until maturity or a default event, with maturity terms often negotiated between one and two years (a general market observation, not a legal rule).
3. Conversion trigger. A SAFE usually converts at any qualifying equity financing. A convertible note often requires the company to raise a minimum amount before automatic conversion, and the maturity date adds a hard deadline.
4. Downside on a stalled raise. If the next round never happens, a SAFE simply sits there (subject to its terms on a dissolution or liquidity event). A convertible note can fall due at maturity, which creates real pressure: repayment, extension, or conversion at a default valuation.
For how these instruments interact with founder equity and team incentives, see our notes on vesting agreements and ESOPs.
Are SAFEs and convertible notes valid under Hong Kong law?
Both instruments are used in Hong Kong, but they must be tailored to the Hong Kong Companies Ordinance (Cap. 622) and, where relevant, the Securities and Futures Ordinance (Cap. 571), not dropped in from a US template. A few practical points:
- A Hong Kong company’s share issuance, conversion mechanics, and authority to allot shares need to work under Cap. 622 and the company’s articles. Convertible note issuance is commonly approved by board resolution and, where required, by shareholders.
- US-standard SAFE forms assume Delaware-style preferred stock and concepts that do not map cleanly onto Hong Kong company law, so a SAFE used here should be adapted for a Hong Kong company.
- Offering interests to investors can engage Hong Kong securities and prospectus rules; how you raise, and from whom, matters. Get regulatory and corporate and commercial advice before you circulate documents.
The headline message: the instrument is only as good as its drafting under Hong Kong law.
Should a Hong Kong startup use a SAFE or a convertible note?
A SAFE tends to suit you if: you are pre-seed or seed and want speed and low legal cost; you do not want debt or a maturity deadline hanging over the company; or your investors are comfortable with a non-debt instrument.
A convertible note tends to suit you if: you have some traction and a clearer path to a priced round; your investors want downside protection such as interest accrual, a maturity date, and creditor status; or you expect a defined near-term raise that will trigger conversion.
There is no universally “better” instrument. It depends on stage, investor expectations, and how much certainty each side wants. And the terms that actually drive outcomes (valuation cap, discount, conversion triggers, and what happens at maturity or on exit) matter far more than the label.
Comparison table: SAFE vs convertible note
| Feature | SAFE | Convertible note |
|---|---|---|
| Legal nature | Not debt — right to future equity | Debt instrument (converts to equity) |
| Interest | None | Usually accrues (often single-digit %) |
| Maturity date | None | Yes — creates a repayment deadline |
| Repayment risk if no round | Generally none (subject to terms) | Can fall due / require repayment |
| Speed & cost | Usually faster, lower cost | More terms to negotiate |
| Valuation cap / discount | Commonly used | Commonly used |
| Conversion trigger | Typically any qualifying equity round | Often a minimum raise; plus maturity |
| Investor protection | Lower (no creditor status) | Higher (creditor + interest) |
| Balance sheet | Not booked as debt | Booked as a liability |
| Best stage | Pre-seed / seed | Seed with traction / bridge rounds |
| HK adaptation needed | Yes — adapt US form to Cap. 622 | Yes — draft under Cap. 622 |
General comparison only; individual deals vary. Verify legal characterisation and statutory references with current Hong Kong law.
Frequently asked questions
Is a SAFE debt or equity in Hong Kong? A SAFE is generally structured as neither a conventional loan nor present equity — it is a contractual right to receive shares in the future. It is not intended to be a debt instrument, which is a key difference from a convertible note. How it is treated for accounting and tax should be confirmed with your advisers on the specific terms.
Does a convertible note have to charge interest? Not necessarily. In Hong Kong it is common, as a matter of commercial practice rather than any legal rule, to see convertible loan notes that are interest-free until maturity or a default event, with interest then accruing. Whether to charge interest, and at what rate, is a commercial negotiation rather than a legal requirement.
What is a valuation cap and a discount? A valuation cap sets the maximum valuation at which the investment converts into equity, protecting the early investor if the company’s valuation rises sharply. A discount lets the investor convert at a lower price per share than new investors in the round. Where both apply, investors usually get whichever gives the better (lower) conversion price, unless the instrument provides that the cap and discount are combined — so check the specific drafting.
What happens to a convertible note if we never raise a priced round? Because a convertible note has a maturity date, it can become repayable if conversion has not been triggered by then. In practice the parties often negotiate an extension, a conversion at a default valuation, or repayment. This deadline risk is one of the main reasons some founders prefer a SAFE.
Can we use a US SAFE template for a Hong Kong company? You can start from one, but it should be adapted. US SAFEs assume Delaware-style preferred stock and US concepts that do not translate directly into Hong Kong company law. The conversion and share-issuance mechanics need to work under the Companies Ordinance (Cap. 622) and your company’s articles.
How does this affect founder dilution? Both instruments dilute founders when they convert, and the valuation cap and discount determine how much. Modelling the conversion at the next round — alongside any ESOP pool and vesting arrangements — is essential before you sign.
Which do Hong Kong investors prefer? It varies. Some early-stage investors are comfortable with SAFEs; others prefer the creditor protection of a convertible note. The right answer is the one your actual investors will sign — which is why getting the term sheet right early saves time and cost.
How TITUS helps founders
TITUS works with Hong Kong founders from the first term sheet onward: choosing between a SAFE, a convertible note, or a priced round; adapting instruments to the Companies Ordinance and your company’s articles; negotiating valuation caps, discounts, and conversion mechanics; and joining the dots with cap-table planning, ESOPs, and vesting. We keep the documents lean, founder-aware, and enforceable under Hong Kong law.
Raising soon? Get your instrument right before it goes to investors: Book a consultation or contact us.
This article is general information only and is not legal advice. It reflects our understanding of Hong Kong law as at the date of writing and may not reflect later changes. You should obtain specific advice before acting. For advice on startup financing in Hong Kong, contact TITUS Solicitors.