Legal, tax and dilution angles; decision tree graphic.
At pre‑seed and seed, two instruments dominate in MENA: the post‑money SAFE and the convertible note. Both defer pricing until a future round; they differ in legal nature, dilution mechanics, and failure cases. Here’s a founder‑friendly comparison with a GCC lens and a decision tree you can copy.
Key takeaways: SAFEs are not debt and keep negotiations short; convertibles are debt with interest and maturity, which can force a decision. Use post‑money SAFEs if you want clarity on investor %; use notes if you need downside protection or a long runway before a priced round. Be explicit about ESOP sizing, MFN, and pro‑rata. Always localise paperwork for UAE/KSA when needed.
Pick the instrument that matches timeline, governance, and dilution clarity.
Default to a post‑money SAFE for speed and clean dilution; use a convertible note if you need a maturity date, interest, or negotiation leverage.
A YC‑style post‑money SAFE fixes investor ownership at the cap (investment ÷ post‑money cap) before your next priced round. Convertible notes accrue interest and typically include a maturity date and default rights. In the GCC, both instruments are used; align with local counsel and your incorporation venue (DIFC/ADGM/onshore UAE or KSA).
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Choose the instrument based on time to priced round, leverage, and governance. If you need more than ~12–18 months before pricing, a note can keep parties engaged.
If you prioritise speed, minimal legal cost, and clear dilution → use post‑money SAFE. If investors require downside protection, a maturity date, or you anticipate a long path to Series A → use a note. Avoid stacking multiple pre‑money SAFEs; you will lose track of dilution. Consider a cap table summary for all convertibles.
SAFE: contract for future equity (not debt). Note: debt that converts. Localise to your governing law (e.g., DIFC/ADGM) and add investor side letters only when needed.
Post‑money SAFEs are standardised and usually require fewer negotiations (cap, MFN, pro‑rata). Convertible notes introduce interest, maturity, default remedies, and sometimes security. Where you incorporate affects terms and enforceability; GCC founders often use DIFC/ADGM or Delaware with local side docs for invoicing/tax.
Interest in a note may raise Sharia concerns in KSA structures; some investors prefer non‑interest structures or alternatives. Treatments vary—work with counsel and tax advisors for UAE corporate tax and KSA ZATCA.
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Post‑money SAFE sets a fixed % of the company pre‑Series A; a note’s effective % depends on principal+interest and the conversion cap/discount.
Example: raise $500k on a $6m post‑money SAFE → investor owns ~8.33% pre‑Series A. A $500k note at a $6m cap, 6% interest, converting after 12 months, converts ~8.8% before the round (principal+interest). Both are diluted by the priced round and the ESOP you top up.
Publish a one‑page summary of every SAFE/note: cap, discount/MFN, pro‑rata, interest, maturity, and most‑favoured nation.
Share a cap table snapshot (fully diluted) with investors. Keep standard definitions of ‘pre‑money’ and ‘post‑money’, option pool sizing, and what triggers conversion. Align your data room and board updates to the same definitions.
Investor‑facing pages should feel instant: INP ≤200 ms, LCP ≤2.5 s, CLS ≤0.1. Clunky portals create avoidable doubt.
Compress hero imagery, preconnect to your storage/CDN, and avoid layout shifts in accordion sections. Faster pages make diligence smoother and raise conversion on your contact and pricing pages.
Choose a governing law that investors recognise and that you can operate.
DIFC and ADGM are common‑law free zones with investor‑familiar company and securities frameworks; many regional SAFEs/notes use their law and courts. Onshore UAE companies can still raise via convertibles, but paperwork and approvals may differ. Whatever you pick, keep consistency across your cap table and resolutions.
Invoice/instrument currency, governing law and courts, tax wording, signatory authority, and any required company approvals. Keep a one‑page explainer for investors who are less familiar with the chosen venue.
Plan for maturity and interest with local counsel.
Convertible notes are used in KSA; maturity and interest need careful drafting to align with local law and, for some investors, Sharia considerations. Some investors prefer non‑interest alternatives or a deferred share sale construct. Paper your choice clearly and maintain a summary sheet in the data room.
Coordinate early with finance on ZATCA and any corporate tax implications. Keep investor communications consistent with your legal position and invoicing approach.
Ambiguity dilutes founders.
Common traps: ESOP defined as pre‑ or post‑round (affects everyone’s %), cap defined as pre‑ vs post‑money, discount‑only SAFEs layered with MFN, and notes with compounding interest that few model correctly. Fix by defining terms in a term sheet addendum and attaching a one‑page cap table showing fully diluted ownership today and at the next priced round.
Share the latest YC post‑money SAFE user guide for definitions; state whether your ESOP is topped up pre‑ or post‑money; and publish a living summary of all convertibles.
Keep a single source of truth.
Build a worksheet listing every instrument (date, cap/discount, MFN/pro‑rata, principal/interest for notes). Calculate implied ownership for each SAFE at today’s cap and for each note at principal+interest. Add scenarios for ESOP top‑ups and for a priced round at multiple valuations. Share screenshots with investors during the round to maintain trust.
Investor, instrument type, amount, cap, discount, interest, MFN, pro‑rata, maturity, conversion trigger, notes.
Price when your motion is repeatable and stacking starts to hurt.
If you can show pipeline conversion, retention, and a credible hiring plan, a priced seed or Series A cleans up the stack. It also clarifies governance and information rights. If you’re still learning, one more SAFE may be fine—just avoid a maze of bespoke side letters.
Reduce surprises by setting expectations early.
Share a short update outlining: the instrument you’ll use, target cap/discount/interest, planned ESOP top‑up, expected timing to a priced round, and a cap table snapshot. Attach FAQs so every angel has the same answers, and use a single email alias for follow‑ups.
Post‑money valuation: the value after new cash is added; in the YC post‑money SAFE it sets the percentage ownership of the investor prior to the priced round.
MFN: Most Favoured Nation; allows a later investor to elect better terms you gave someone else.
Pro‑rata right: a right to invest in future rounds to maintain ownership %.
Maturity: a date by which a convertible note must convert or be otherwise resolved.
Qualified financing: a priced round meeting defined size/terms that triggers conversion.
Use this to prep your data room.
Quick answers to founder questions on SAFEs vs notes.
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