šø Beyond the runway, Unfiltered, Quick guide to SAFEs, ASAs, and not messing up your cap table
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The First Round: a quick guide to SAFEs, ASAs, and not messing up your cap table
By Stephen Trombala, Partner & Head of Corporate, Shepherd and Wedderburn
When youāre getting a startup off the ground and need investment, for most founders, the priority is pretty simple: get money in, as efficiently and cheaply as possible, so you can spend it on actually building the thing. But the way you take that first money in matters more than most founders realise. Hereās a rundown of the terms and instruments you might come across and the early housekeeping thatāll save you a headache later.
SAFEs, ASAs, and CLNs: whatās the difference?
Most founders assume SAFEs and ASAs are the same thing. And at a high level, it makes sense as to why: both let an investor hand you money now in exchange for equity later, without having to agree a valuation upfront. Itās āpuntā money. Hopefully it works out, and if it doesnāt, itās gone. The investor acknowledges that.
But in practice, the two instruments work quite differently. A SAFE, or Simple Agreement for Future Equity, came out of Y Combinator in the US. Itās designed to be minimal: no maturity date, no interest, and typically no hard deadline for conversion. An ASA, or Advance Subscription Agreement, is often painted as the UK equivalent, built specifically to sit within UK company law and, importantly, to align with SEIS and EIS tax relief schemes. ASAs typically include a longstop date, which is a backstop by which the investment must convert into shares, usually at a pre-agreed default price. SAFEs donāt usually have that mechanic. So if your investors care about tax relief, an ASA is almost certainly the route youāll be encouraged to go down. If youāre dealing with institutional or international investors who might be more used to a SAFE serving the early-stage alternative to a priced round, a UK-adapted SAFE might make more sense. Both are good instruments for early-stage companies. Just make sure youāre using the one that actually fits your situation.
Then there are convertible loan notes (CLNs), which are a different beast altogether. They come with a string attached: technically, the investor could ask for the money back, because itās a loan. For an early-stage company with no means to repay debt, thatās a risk you probably donāt need to be taking. Iād generally steer most startups away from them at the outset.
Caps, discounts, and the question of price
One of the real advantages of both SAFEs and ASAs is that you donāt have to price the company when itās far too early to do so sensibly. Pricing an equity round at the very beginning can sometimes do more harm than good. The beauty of these instruments is that you can defer that conversation to a point where thereās actually something to price.
In practice, youāll usually see either a valuation cap, a discount from the next round price, or both. A cap tends to be more investor-friendly. A simple discount from the next round price is generally more company-friendly. But ultimately, itās all up for negotiation.
The six-month rule
If your investors are looking for SEIS or EIS tax relief, thereās a wrinkle worth knowing about. HMRC guidance generally expects an ASA to convert into equity within six months. Itās a rule that, in many peopleās view, doesnāt make a great deal of sense: the money is committed and the investor is never getting it back, so why impose an arbitrary deadline? Weāve actually made a number of representations to HMRC about relaxing that time period. So far, no joy.
That said, itās worth noting that the six-month rule isnāt always an absolute requirement, and the way it applies can depend on how the instrument is structured. But it is the expectation in most cases, and if your investors need those tax benefits, youāll likely have to work within it. My general advice: donāt let the tax tail wag the dog. If you can structure your raise sensibly around it, great. If tax relief isnāt a factor for your investors, donāt let it bend your fundraise out of shape.
Getting your cap table right from day one
With my legal hat on, there are a few things worth bearing in mind that might sound boring, but, without question, are issues that often trip up the most early-stage companies.
Hereās a scenario we see often: a group of founders get together, one person gets sent off to incorporate the company, and that founder ends up as the sole shareholder with one share. Everyone agrees theyāll sort out the proper split later. Then six or seven months pass, some development work gets done, maybe a SAFE comes in, and suddenly the actual cap table doesnāt match the one on the whiteboard. The headaches this can cause are of course fixable, but waste time and money later.
Just doing the basic housekeeping at the outset is really important. If thereās more than one founder, get the pro ratas actually issued from the get-go. You will save yourself a lot of pain in eight or twelve monthsā time. If you issue the shares right at the start, itās dead straightforward, inexpensive, and yes, boring. If you leave it nine or ten months, youāve potentially created a tax problem, and youāll end up spending money fixing something that would have cost nothing on day one.
A couple more practical points when forming your company: make sure you set up your shares with enough granularity. If there are three of you, donāt just have one share each. Itās also wise to watch your nominal share value. Companies that set up with shares at Ā£1 each quickly run into trouble. Most properly structured companies use a nominal value of something like Ā£.001 (0.1 of a penny), so you can issue a large number of shares to the founders without it costing anything meaningful. As a bonus, the premium paid above that tiny nominal value gets credited to a more flexible account on the companyās share capital.
Keeping the basics in mind
None of this is glamorous, and none of it is why you started a company. But getting the basics right early means youāre not burning cash on legal fixes six months down the line. And that cash is better spent on building your business.
Stephen Trombala is the head of Shepherd and Wedderburnās Corporate division. He has particular expertise in equity capital markets, mergers and acquisitions, and private equity. This is Part one of a three-part series on legal fundamentals for startup founders, produced in partnership with Shepherd and Wedderburn. Part two will cover foundersā agreements, and Part three looks at the terms youāll encounter as you scale.
To find out more about how Shepherd and Wedderburn can help you design a share incentive scheme that works for both you and your team members, reach out to them here.
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Events
š» 14/04, 18:00, šŗļø Glasgow: Small99ās People, Planet, Pintā¢: Sustainability Meetup Discover how Glasgow is becoming a āSponge Cityā in this relaxed pub talk, exploring rain gardens, greener streets, and community-led solutions to climate resilience through People Planet Pint. MORE INFO
š» 16/04, 18:30, šŗļø Edinburgh: Small99ās People, Planet, Pintā¢: Sustainability Meetup Meet others locally for a relaxed chat about sustainability over a drink. MORE INFO
š„ 21/04, 18:00, šŗļø Edinburgh: Founders Meetup Join tactical fireside chats with experienced entrepreneurs plus speed networking, community shoutouts, and drinks to wrap up MORE INFO
š¬ 21/04, 17:00, šŗļø Edinburgh: Blockchain Scotland Meetup Join us at the Bayes Centre for networking and three upcoming talks MORE INFO
š 22/04, 12:00, šŗļø Virtual: Beyond the Runway: What No One Tells Founders About Insolvency A founder-led session creating space for honest conversations about financial pressure, insolvency, and navigating tough business decisions with support from those whoāve been through it. MORE INFO
ā 23/04, 9:00 am, šŗļø Edinburgh: Edinburgh Professionals Quarterly Networking A relaxed networking meetup for local professionals and founders to connect, with guided activities, great conversations, and breakfast on us from Barclays Eagle Labs. MORE INFO
ā 23/04, 9:00 am, šŗļø Edinburgh: Creating Clarity: Finding your next step into business A relaxed workshop to help you explore business support options, gain clarity on your next steps, and connect with others in a supportive space. MORE INFO
š 23/04, 12:00, šŗļø Edinburgh & Virtual: Term Sheets - What youāre really agreeing to and why it matters A practical session helping founders confidently navigate term sheets, understand key clauses, and avoid costly mistakes before and during fundraising. MORE INFO
ā 23/04, 9:00 am, šŗļø Edinburgh: Founder Friday Coworking A focused coworking day for founders and execs to connect, share ideas, and build alongside like-minded peers in a relaxed, energising space. MORE INFO
š» 28/04, 17:30, šŗļø Edinburgh: Tech Meetup a monthly, no-pressure space for Scotlandās tech community to connect, share ideas, enjoy peer-led talks, and grab pizza and drinks. MORE INFO
š» 28/04, 11:00 am, šŗļø Edinburgh: Co-Work Club Edinburgh Escape the home office with this flexible coworking day at YOTEL, offering unlimited coffee, pastries, a stylish workspace, and relaxed networking with like-minded professionals. MORE INFO
š 29/04, 18:00, šŗļø Edinburgh: People, Planet, Pint presents Bunker to Table discover how an Edinburgh nuclear bunker became a mushroom-growing space, with producer and chef Christopher Valentine-Allan sharing practical insights and community-led ideas. MORE INFO
š§ 29/04, 18:15, šŗļø Edinburgh: People, Planet, Pint presents Bunker to Table. Join this interactive workshop to explore human-centred ways of working, with practical tools to build more autonomy, clarity, and less hierarchy in organisations. MORE INFO
š 30/04, 9:00 am, šŗļø Hawick: Reimagined SMAS Business Improvement Academy, Hawick Join this LCS-accredited 10-day Business Improvement Academy to build Lean expertise, deliver real impact projects, and drive lasting productivity and leadership across your organisation. MORE INFO
š³ FSTech Summit On April 30th, a one-day Edinburgh conference bringing together finance and tech leaders for ātalks, panels, and networking on AI, blockchain, payments, and the future of financial servicesā. Details Here
āļø Unfiltered Series: Open to everyone, join CodeBase to connect with members of the local tech community. Come for a coffee, networking, & build connections!
ā 06/05, 08:30 šŗļø Aberdeen: MORE INFO
ā 06/05, 08:30 šŗļø Edinburgh: MORE INFO
ā 07/05, 09:00 šŗļø Glasgow: MORE INFO
ā 05/05, 09:00 šŗļø Inverness: MORE INFO
š½ļø 11/05, 12:00, šŗļø Edinburgh: U.S Expansion Founders Lunch feat. Wilson Sonsini An exclusive founder lunch for Scottish startup leaders to share insights and get practical advice on US expansion, hiring, and fundraising from experienced experts. MORE INFO
š” Fast Forward: Data, Digital & AI A one-day conference on 2 June with the University of Edinburgh exploring data, digital, and AI through talks, workshops, and cross-sector collaboration. āConnect with researchers, industry, and public sector partners to share ideas and explore real-world applicationsā. Details here
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