24 November 2023

Financial Instruments for Early Seed and First Round Investments

Today, innovation is the norm. Business models are constantly evolving, and financial instruments play a crucial role in shaping the business future. This article looks at three emerging models that impact the business and financial landscapes: the widely used convertible loan, the Simple Agreement for Future Equity (SAFE), and the Agreement for Subscription against Advance Payment (ASAP).

In this contribution, we delve deeper into these models, examine their impact on companies and investors, and shed light on the legal considerations inherent in these financial approaches.

Converible loan

A convertible loan is a financing instrument widely known and extensively used by especially young companies to attract capital. It combines features of both debt and equity, making it attractive to both investors and entrepreneurs.

In practice, a convertible loan is a loan that can be converted into shares of the issuing company at a later date. In exchange for providing capital, the investor receives interest payments during the loan period. At a predetermined moment, often under specific conditions in the agreement, the investor and/or the company itself have the option to convert the loan into shares of the company.

When entering into a convertible loan, investors should carefully study the conversion terms. This includes determining the conversion moment, the conversion price, and any adjustments that may occur in certain events, such as a new financing round or even bankruptcy.

The ranking relative to other creditors/shareholders is crucial in case of bankruptcy or liquidation of the company.

Finally, investors must be aware of their rights during the loan period, such as protection clauses or input in significant decisions.

Clear communication is crucial when drafting the convertible loan. Transparency can prevent future disputes, and it is advisable to document all agreements in advance in a legally binding document. The issuing company should therefore specify how the provided capital will be used and be accountable to the investor.

In addition to agreements on the loan and its conversion, parties should also consider the situation after conversion and the agreements regarding the mutual legal relationship as shareholders.

Simple Agreement for Future Equity (SAFE)

A Simple Agreement for Future Equity is a financing agreement between an investor and a company, often a startup (commonly early seed), wherein it is agreed that the investor has the right to a certain number of shares in the company on a future date, typically during a future financing round. Unlike convertible loans, a SAFE does not include interest payments or a fixed term.

SAFEs are known for their simple structure, speeding up the negotiation process significantly and reducing costs. This makes it an attractive option for investors and entrepreneurs who want to act quickly in the dynamic startup world.

Another advantage is that the classic risks of debt are much less present in SAFE agreements since they do not involve interest payments or repayment obligations. However, parties can decide otherwise and structure the SAFE as equity instead of debt. In the Netherlands, the ASAP is increasingly used for equity qualification. This allows startups to grow and invest more easily, and it gives SAFE investors a greater chance to benefit from the valuation growth of a startup. In a SAFE, the investor does not commit to a specific valuation at the time of the investment but rather chooses a valuation method. This also simplifies negotiations.

Due to the straightforward nature of SAFE agreements, startups can raise capital more quickly compared to more traditional forms of financing. Administrative burdens are consequently much lower. The company does not need to have a (concrete) valuation, reducing legal costs and complexity.

Unlike convertible loans, SAFE agreements do not carry interest expenses, allowing startups to focus on growth instead of generating immediate cash flow. Despite all these advantages of SAFE agreements, it is crucial that the terms regarding conversion, valuation mechanisms, and investor rights are clearly defined.

Despite their name, SAFE agreements still bring some legal complexities and risks. It remains essential that both parties are well-informed and seek legal advice to ensure a solid agreement. Understanding the characteristics and legal implications of SAFE agreements is one of the keys to a successful and mutually beneficial financing round.

Agreement of Subscription against Advance Payment (ASAP)

Lastly, there is the Agreement of Subscription against Advance Payment, or the ASAP agreement. The ASAP is a variant of the SAFE and grants an investor the right to acquire shares in the company’s capital against immediate payment of the issuance price. The paid amount is, unlike the SAFE, booked as equity under reserves instead of as debt.

ASAP shares can be issued in various scenarios, such as the closure of a financing round, transfer of more than 50% of the shares, or the occurrence of an event like a bankruptcy application. The remaining amount of the investment after the issuance of ASAP shares is booked as additional paid-in capital.

The procedure for issuing ASAP shares includes prior notification to the investor, providing details about the number of shares to be issued, the issuance date, and, in financing rounds or termination, information about new investors and agreed-upon prices.

Since the issuance of shares requires cooperation from the startup, the interests of the ASAP investor are protected through an irrevocable power of attorney to issue the ASAP shares before or at the latest by the closing of the new financing round. Additionally, a discount may be applied to the calculated issuance price as an additional safety measure.

When the company then makes a profit and the general meeting decides on a profit distribution, the investor has a dividend right. This generally does not apply to interim dividends, allowing the ASAP investment to continue as equity instead of debt.


This contribution on convertible loans, Simple Agreements for Future Equity (SAFE), and Agreement of Subscription against Advance Payment (ASAP) makes it clear that the business world is in a time of remarkable transformation. These agreements have not only changed the way capital is acquired and managed but have also revised the dynamics between investors and entrepreneurs. Convertible loans, with their unique blend of debt and equity, offer startups a flexible financing route, while SAFE agreements bring speed and simplicity to the venture capital world. On the other hand, the ASAP model illustrates that investments can also be made gradually over a longer period.

Within these innovative approaches, a common thread is found: the importance of clear legal frameworks. Whether establishing convertible loan terms, defining SAFE clauses, or formulating transparent subscriptions, legal precision is essential to ensure success and minimize disputes. Understanding these dynamics and embracing legally sound strategies will remain crucial for companies aiming for growth and sustainability in a constantly evolving world.

This contribution was written by Reinoud van Ginkel in collaboration with Mathijs Arts. If you have questions about the convertible loan, SAFE, or ASAP, or if you would like to discuss further, please contact Mathijs Arts, Reinoud van Ginkel, or one of our other Mergers and Acquisitions (M&A) specialists.

Mr. R. (Reinoud) van Ginkel

Attorney at Law

M.A. (Mathijs) Arts

Attorney at Law & Partner

Call: +31 172 530 250