SAFE Agreements vs Convertible Notes in Nigerian Corporate Law

The Adoption of SAFEs in Local Practice

Simple Agreements for Future Equity (SAFEs) popularized by Y Combinator are widely used by African founders to raise early funding without setting a fixed valuation. However, SAFEs are contractual promises, not equity shares.

Founders must ensure SAFE provisions comply with the Companies and Allied Matters Act (CAMA) regarding authorized share capital and corporate resolutions.

Convertible Notes and Interest Rate Considerations

Unlike SAFEs, convertible notes are debt instruments that carry a stated maturity date and interest rate. If a qualified financing round is not closed before maturity, the investor can demand debt repayment or trigger automatic conversion.

Founders who fail to anticipate maturity deadlines can find themselves backed into stressful negotiations during economic downturns.

Clean Cap Table Hygiene

Signing multiple SAFE rounds with varying valuation caps without updating a pro-forma capitalization table leads to massive dilution upon equity conversion. Founders must model dilution scenarios rigorously before signing funding instruments.