“Do we sign a SAFE or a convertible note?” That is the question founders bring, and it is framed wrongly. Both drafts arrive for the same reason: postponing the valuation argument and closing quickly. What is really being chosen is where the risk falls. The difference fits into one sentence. A note is debt; it has a maturity date, interest accrues, and if conversion has not happened by the time it falls due, a repayable claim remains. A SAFE is not debt; it carries no maturity and no interest, and does nothing but promise a future issue of shares.
The sentence sounds technical; its consequences are not. How the company looks on its balance sheet, how the cash calendar is built, where the investor sits when things go badly, which clauses the next round is fought over — all of it follows. The mechanics of each instrument we have set out separately, in the pieces on SAFEs under Turkish law and on bridge financing with convertible notes and KISS. The decision is made here: which of the two drafts fits this company, this investor and this calendar?
There is a further layer. Neither instrument is a contract type Turkish law recognises; both are imports, and in a Turkish joint stock or limited liability company neither creates shares by itself. Conversion still requires a capital increase (sermaye artırımı) resolution, a properly executed share subscription (pay taahhüdü) and registration. The choice is not made with the investor alone, then, but with the company’s own corporate machinery.
Debt, or a forward promise of shares?
On the note side the legal character is settled: money is lent and must be repaid. Until conversion the investor is a creditor, not a shareholder — no vote at the general assembly (genel kurul), no dividend, but a claim on the company. In Turkey it is usually structured as a convertible loan agreement, with conversion achieved by paying up the new shares in the capital increase through set-off of the outstanding claim.
On the SAFE side there is no repayment obligation: the investor pays today and, on a defined event, acquires the right to receive shares. The closest Turkish analogue is a preliminary contract by which the parties undertake to enter into a subscription relationship later; article 29 of the Turkish Code of Obligations (Türk Borçlar Kanunu, TBK) ties such a contract’s validity to the form required for the contract to be concluded. The real mistake is signing the English text as it stands while nothing is put in place on the Turkish side. On the conversion date the investor then holds paper with no enforceable obligation behind it.
One boundary applies to both. In a joint stock company the articles of association (esas sözleşme) may depart from the statute only so far as the law permits, under article 340 of the Turkish Commercial Code (Türk Ticaret Kanunu, TTK); much of the conversion promise and the voting mechanics therefore belongs in the shareholders’ agreement (pay sahipleri sözleşmesi). In a limited liability company, article 595 of the TTK makes share transfers subject to general assembly approval — a point to put to the investor on signing day, not on conversion day.
What the balance sheet and the cash calendar say
A note shows up as a liability the day it is received. It is not equity, and it distorts the leverage ratios read in bank lending files, grant applications and tenders. In a thin early stage balance sheet this surfaces somewhere unexpected: the money is in, revenue has grown, and the statements look worse than before.
Classifying a SAFE is an accounting policy decision, made by the accountant reading the contract itself. Any redemption, return or cash-settlement trigger weakens the argument that this is not a liability, and a conversation before signature costs less than restating the accounts afterwards.
On the cash side one practical measure is worth applying: a note’s maturity should sit well beyond the point at which the company runs out of cash. A maturity falling close to the end of the runway puts the founder in the worst negotiating position there is, working in one week to close a round and defer a debt already due. A SAFE carries no such pressure; the paper waits until the conversion event.
Where does the investor stand if things go badly?
The difference bites hardest here. A note holder is a creditor: in payment difficulty the claim ranks ahead of shareholders, sits among creditors’ claims in a composition or liquidation, and can be enforced through collection. A SAFE holder is not a creditor; the right is whatever the liquidation scenario in the contract says, and where that scenario was never drafted, it is nothing.
There is a mirror image on the founder’s side. In Turkey, angels putting in debt-like money regularly ask the founder for a personal guarantee or a buy-back undertaking. The moment that is accepted, the instrument stops being bridge financing and becomes personal exposure: if the company fails, the debt stays with the founder. This is exactly where the negotiation stops. The way out is to change the instrument rather than the wording — if the security demand stands, that money is arriving as debt, not as a SAFE, and should be priced accordingly.
Money from abroad opens one more layer. Where the investment carries the character of debt, its inflow, its repayment and the set-off on conversion fall within exchange control legislation, while a quasi-equity structure is assessed along a different path. Leaving that unsettled causes trouble not on the day the funds land, but on the day the conversion is registered.
The clauses the next round is negotiated over
The bridge paper is the first document the next lead investor reads, and the lead wants the shares coming out of conversion inside the fully diluted share count. The fight is seldom about a rate. It is about the base conversion applies to — do the converting shares count before the round or after it?
That question goes straight to the dilution maths, and the answer is usually heavier than the founder expects. With a note, accrued interest converts alongside principal, so the converting amount exceeds the money that came in; a SAFE has no accrual, but the discount and the valuation cap reach the same place by another route.
Then there is stacking. A seed round carrying papers signed one after another on inconsistent terms delays the closing by weeks. Reusing one text beats conceding separately to each investor; when signing the first, think about the ones that follow.
When conversion never occurs
On the note side, maturity arrives and three roads remain: extension, repayment, or a mandatory conversion written in beforehand. Extension is easy as a mechanic and hard as a negotiation: the person opposite is now a creditor with a claim already due. Parties who never wrote down what happens at maturity meet that day as a crisis.
On the SAFE side there is no maturity; the paper hangs on the cap table. Comfortable for the founder, wearing for the investor. If the company turns profitable and never opens a round, the SAFE holder has neither shares nor a claim, so the contract must deal separately with a sale of the company, a change of control, and the case where no priced round comes. In a software business with export revenue growing out of its own cash flow, that is not a hypothetical.
Choosing between them
The decision sits where four questions meet, best taken in this order.
- Is the next round visible? Where talks with an institutional investor have progressed and the round has a timetable, a maturity can be positioned realistically. Where the round is uncertain, setting one is a trap of your own making.
- Who is the investor? Institutional funds and accelerator programmes are used to standard SAFE forms; an angel or a family investor wants the possibility of getting the capital back written into the text, and signs a note more readily.
- How long does the cash last? If the runway is short, a dated debt on top of it is not manageable, and a SAFE shields the company from maturity pressure.
- Where is the money coming from? With debt-like funding from abroad the inflow, the repayment and the set-off are each assessed separately, while a quasi-equity structure keeps the process leaner. The investor’s country of residence can shape the instrument before price is discussed.
Where all four point the same way, the decision makes itself. Where they do not — the round is not visible, say, but the investor insists on a repayment route — negotiate the maturity and security clauses, not the name of the instrument.
The sequence that works: map the cash calendar first, ask the investor plainly about risk appetite and any expectation of repayment, and choose the instrument last. Picking the instrument first and bending the calendar to fit lands founders in the same place every time — a debt fallen due and a round not closed. This is not a question of fashion; it is a decision taken where the company’s cash calendar meets the investor’s appetite for risk. Whichever way it goes, the corporate steps that make conversion possible on the Turkish side belong in the plan on signing day; without them, the best drafted text falls flat on the conversion date.
This article is provided for general information only and does not constitute legal advice. Please seek legal support for an assessment of any specific matter.
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