Simple Agreements for Future Equity (SAFE notes) and convertible loan notes are funding instruments that allow early-stage startups in Kenya to raise capital without immediately determining the company’s valuation. Instead of issuing shares at a fixed price, the startup issues an instrument that converts into equity at a later funding round, at a discount to the price paid by the later investors. SAFE notes have become the dominant early-stage funding instrument in Silicon Valley and are increasingly used in Nairobi’s growing startup ecosystem. Understanding how these instruments work in the Kenyan legal context, and how to structure them to protect both founders and investors, is essential for anyone participating in Kenya’s startup funding market.

What is a SAFE Note

A SAFE (Simple Agreement for Future Equity) is not a loan. Unlike a convertible loan note, a SAFE does not accrue interest and does not have a maturity date on which repayment can be demanded. A SAFE is a contractual right to receive shares in the company at a future qualifying funding round, at a price that is discounted relative to what the later investors pay. The original SAFE was created by Y Combinator in 2013 and has been widely adopted in the global startup ecosystem. Kenya’s startup community has adapted the SAFE structure to work within the requirements of the Companies Act 2015 and Kenyan contract law.

Key Terms of a SAFE Note

Valuation Cap

The valuation cap sets a maximum company valuation at which the SAFE converts. If the company raises its next round at a valuation above the cap, the SAFE holder converts as if the company were valued at the cap, receiving more shares than a new investor paying the same amount at the higher valuation. The valuation cap is the investor’s protection against upside risk: if the company is wildly successful, the cap ensures the early investor captures part of the value they helped create.

Conversion Discount

The conversion discount gives the SAFE holder the right to convert at a percentage discount (typically 15% to 25%) to the price paid by new investors in the qualifying round. A 20% discount means that if Series A investors pay KES 1,000 per share, the SAFE holder converts at KES 800 per share, receiving more shares for their investment than the later investors. Most SAFEs use either a cap, a discount, or both; using both provides the SAFE holder with the more favourable of the two conversion terms.

Qualifying Financing Event

The SAFE converts automatically upon a qualifying financing event, typically defined as a priced equity round above a minimum amount. The definition of the qualifying event must be precisely drafted: if set too low, the SAFE converts on a small friends-and-family round; if set too high, the SAFE may never trigger. Most Kenyan startup SAFEs define the qualifying event as an equity round of at least USD 500,000 or KES 65 million from institutional investors.

Liquidation Preference

Some SAFEs include a liquidation preference providing that on a liquidity event (acquisition or winding-up), the SAFE holder receives their investment back before any distribution to ordinary shareholders. A 1x non-participating liquidation preference (the most common) simply means the investor gets their money back first; more aggressive structures may provide a multiple or participation rights that can significantly dilute founders on a trade sale.

Convertible Loan Notes vs SAFE Notes

A convertible loan note is a debt instrument that converts into equity. Unlike a SAFE, a convertible note accrues interest (typically at 5% to 12% per annum) and has a maturity date. If the company has not raised a qualifying round by the maturity date, the noteholder may demand repayment or convert at a predetermined price. The interest and maturity provisions of convertible notes make them more complex and create balance sheet obligations for the company that SAFEs do not. For founders, SAFEs are generally preferable because they do not create debt obligations; for investors, convertible notes may be preferred because they provide a debt-like fallback if the company fails to raise a qualifying round.

SAFE Notes Under Kenyan Law

SAFEs are not specifically regulated instruments under Kenyan law. They are enforceable as contracts under the Law of Contract Act (Cap 23). However, several Kenyan law considerations must be addressed in structuring a SAFE. First, the conversion mechanics must comply with the Companies Act 2015 provisions on share issuance, pre-emption rights, and the disclosure requirements for a new share issue. Second, where the SAFE is issued to a foreign investor, the transaction may constitute a regulated investment under the Capital Markets Act and may require CMA clearance. Third, the beneficial ownership implications of the SAFE (which creates a future equity entitlement) should be considered in the context of the beneficial ownership filing obligations at the BRS.

Drafting and Structuring SAFEs in Kenya

A well-drafted Kenyan SAFE should: clearly define the qualifying financing event and the conversion mechanics; address the treatment of the SAFE on a liquidity event including an acquisition; include an information rights clause entitling the investor to quarterly management accounts; include a most favoured nation clause ensuring that if later SAFE investors get better terms, the earlier investor automatically gets those terms; and address the governing law and dispute resolution mechanism. Arbitration under NCIA rules is increasingly preferred for investor-startup disputes in Kenya because of its speed and confidentiality.

Our corporate and commercial practice structures and drafts SAFE notes, convertible loan notes, and investment term sheets for Kenyan startups and their investors. For the underlying company structure, see our guide on shareholders agreements for founders and our Premium Company Incorporation service. For technology startups, see our technology and startups practice.

Post-Money vs Pre-Money SAFEs

The distinction between post-money and pre-money SAFE valuation caps is one of the most important drafting issues in early-stage startup funding. Under a pre-money SAFE (the original Y Combinator model), the valuation cap is measured before the SAFE investment is added to the company’s capitalization table. Under a post-money SAFE (the updated Y Combinator model introduced in 2018), the cap is measured after the SAFE is included in the fully diluted capitalization. For investors, the post-money SAFE provides greater certainty about the ownership percentage they will receive on conversion. For founders, the post-money SAFE can result in higher dilution than they anticipated if the total SAFE amount is large relative to the cap. Kenyan startup lawyers should understand this distinction and advise their clients clearly on which model is being used in any particular SAFE agreement.

Tax Treatment of SAFE Notes in Kenya

The tax treatment of SAFE notes in Kenya is not specifically addressed by the Income Tax Act or KRA guidance as of 2025. SAFE notes are not debt instruments (no interest, no maturity date) but are also not equity until conversion. The most commonly accepted tax treatment is that a SAFE note is not a taxable event on issuance; the taxable event is conversion to equity, at which point the company’s PAYE obligations may be affected if the SAFE converts in a transaction that triggers employment income tax considerations for founders. For foreign investors in Kenyan SAFE holders, the conversion of SAFE to equity and any subsequent disposal of shares may have capital gains tax implications. SAFE structures involving foreign investors should be reviewed by a tax adviser who can assess the cross-border tax implications of the conversion event.

Exit Mechanics and SAFE Holders

Where a company is acquired before the SAFE converts, the SAFE holder’s rights on the exit event depend entirely on the SAFE’s liquidation and change of control provisions. A SAFE without explicit change-of-control provisions may leave the holder in an ambiguous position: are they entitled to the value of the SAFE as a creditor, as an equity holder, or at some other valuation? Well-drafted Kenyan SAFEs address this explicitly, typically providing that on a change of control the SAFE either converts at the applicable conversion price or the holder receives a return of their investment plus a premium, at the holder’s election. Founders who are negotiating SAFE terms should understand these exit mechanics and ensure they are clearly documented before investors sign. For SAFE note drafting and investment advisory services, our team advises both founders and investors on Kenya-appropriate terms.