SAFE notes Kenya founders and investors use are contractual instruments that give an investor the right to receive shares in a later funding round, without setting a company valuation today. A convertible loan note does the same job but is structured as a loan. Neither is a creature of Kenyan statute. They are private contracts, and the Companies Act, 2015 still decides whether and how the shares can actually be issued when the conversion happens. This guide explains the key terms, how SAFEs differ from convertible notes and what Kenyan law requires around them.
What SAFE notes Kenya investors actually hold
A SAFE is a Simple Agreement for Future Equity. The investor pays money now. In return the company promises to issue shares on a defined future event, usually a priced equity round, at a price set by reference to that round. Until conversion the investor is not a shareholder, has no vote and receives no dividends. The instrument originated in the United States, and Kenyan startups that use it normally adapt a standard form to local law rather than signing it unchanged.
Because there is no statute for SAFEs in Kenya, the document itself does nearly all the work. Every term that matters has to be written down, which is why drafting quality is the main protection for both sides.
Key terms in SAFE notes Kenya startups negotiate
Valuation cap. The cap sets the maximum valuation at which the SAFE converts. If the next round is priced above the cap, the SAFE holder converts as if the company were worth the cap, and so receives more shares per shilling than the new investors. The cap rewards the investor for taking early risk.
Discount. A discount lets the SAFE holder convert at a percentage below the price paid by investors in the qualifying round. Many SAFEs combine a cap and a discount, with the holder taking whichever gives the better price.
Qualifying event. This defines the financing that triggers conversion. If it is set too low, the SAFE can convert on a small early round. If it is set too high, conversion may never happen. Define the minimum size and type of round precisely.
Liquidity events. The document should say what happens if the company is sold or wound up before conversion. Some SAFEs entitle the holder to be repaid before ordinary shareholders, and more aggressive terms can significantly reduce what founders receive on a sale.
Pro rata and information rights. Investors often ask for a right to participate in later rounds and to receive regular financial information. These are negotiated terms, not defaults.
SAFE notes Kenya versus convertible loan notes
A convertible loan note is a debt instrument that converts into equity. A SAFE is generally not debt. The usual differences are as follows.
- A convertible note is a loan, so it normally carries interest and a maturity date, and the investor may be able to demand repayment if it is not converted.
- A SAFE usually has neither interest nor a repayment date, which gives founders more breathing room.
- A convertible note gives the investor a creditor’s position if the company fails, while a SAFE holder typically ranks below creditors.
Founders often prefer SAFEs because they create no repayment obligation. Investors often prefer notes because of the debt fallback. The right choice depends on the stage of the business and the leverage each side has. The instrument you pick also affects how the investment is treated in your accounts and in any later due diligence, so confirm the treatment with your accountant.
What Kenyan law requires at conversion
The contract gives the investor a right to shares, but the company can only honour it by issuing shares in compliance with the Companies Act, 2015. Several provisions are relevant.
Section 327 provides that directors shall not exercise a power of the company to allot shares, or to grant rights to subscribe for or convert any security into shares, except in accordance with section 328 or 329. A SAFE grants exactly that kind of right, so the board needs authority under those sections before the SAFE is signed, not only when conversion occurs. Section 328 deals with a private company with only one class of shares, and section 329 with authorisation by the company. If the SAFE will convert into a new class of shares, such as preferred shares, check the company’s articles and the class rights before you sign.
After the shares are issued, section 333 requires a limited company to lodge a return of the allotment with the Registrar within one month, accompanied by a statement of capital. Missing this step is easy when conversion happens during a busy closing, so build it into the closing checklist.
Two further points deserve attention. First, if the investor is based abroad, take advice on whether any other approval or filing applies to the investment or the transfer of funds, because rules differ by sector. Second, once the investor becomes a shareholder, the company’s beneficial ownership records must reflect the change. Our corporate and commercial practice deals with these steps as a package.
Pre-money and post-money caps
SAFEs are commonly offered in two versions. In a pre-money SAFE the cap is applied to the company’s value before the SAFE and other convertible instruments are counted, so each additional SAFE dilutes the founders and earlier holders in ways that are hard to predict. In a post-money SAFE the cap includes all the converting instruments, so an investor can calculate their percentage of the company at the cap precisely, and the dilution falls on the founders. Founders should model the effect of several SAFEs together on the cap table before agreeing a second or third one.
Protecting both sides
A good SAFE for a Kenyan company addresses the points below.
- A most favoured nation clause, so that earlier investors can adopt better terms given to later ones.
- Clear governing law and a dispute resolution clause, whether court or arbitration.
- A statement that the holder is not a shareholder before conversion.
- Board authority to grant the conversion right, as section 327 requires.
- A conversion mechanic that works with the company’s articles and any existing shareholders agreement.
Existing agreements matter here. If your company already has a shareholders agreement, check whether it gives existing shareholders pre-emption or consent rights over new instruments, and whether the SAFE needs their approval.
How We Can Help
Clay & Associates Advocates acts for startups and investors on SAFE notes Kenya deals and other early-stage funding. We can advise on whether a SAFE or convertible note fits the deal, draft and negotiate the instrument, deal with the board and shareholder approvals the Companies Act requires, and manage the allotment filings at conversion. See our technology and startups practice, our corporate and commercial practice, our fees, or contact us to discuss your round.
Sources: Companies Act, 2015 (Kenya Law)
Frequently asked questions
Are SAFE notes regulated by a specific Kenyan law?
No statute deals with SAFEs as such. They are contracts, but the Companies Act, 2015 governs the issue of the shares on conversion.
Do directors need approval to sign a SAFE?
Section 327 of the Companies Act restricts directors from granting rights to convert any security into shares except under section 328 or 329, so the board needs the required authority.
Must the company file anything when the SAFE converts?
Yes. Under section 333, a limited company must lodge a return of allotment with the Registrar within one month after allotting shares.
Is a SAFE the same as a convertible loan note?
No. A convertible note is debt and usually carries interest and a maturity date, while a SAFE normally does not.
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This article is general information on Kenyan law as at its publication date, not legal advice. Reading it does not create an advocate and client relationship.
