Loans Vs Convertible Notes Vs SAFEs For Startup Funding In New Zealand

If you’re raising money for your startup, it can feel like you’ve got two tough choices: either take on debt you need to repay soon, or give away equity before you even know what your business is really worth.

This is where convertible notes and SAFE notes can help. They’re popular “bridge funding” tools that can bring in capital now, while pushing the big valuation conversation to a later funding round (when you’ve got more traction behind you).

But these instruments aren’t interchangeable with a standard loan, and they’re not always “simple” just because they’re common in startup land. Getting the legal mechanics wrong can lead to messy disputes, unexpected dilution, or investors feeling misled.

Below, we break down the differences between business loans, convertible notes, and SAFE notes for New Zealand founders - including how they typically work, what to watch out for, and what documents you’ll likely need to get the deal done properly.

This article provides general information only and isn’t legal or financial advice. Startup fundraising structures can vary significantly, so it’s worth getting advice on your specific raise.

What’s The Difference Between A Loan, A Convertible Note, And A SAFE Note?

At a high level, all three are ways to get money into the business. The big difference is what the investor/lender gets back (and when).

Business Loan (Straight Debt)

A business loan is the most traditional option. Your business borrows money and agrees to repay it (usually with interest) under agreed repayment terms.

Depending on the lender and risk profile, a loan may involve:

• Regular repayments (weekly/monthly)
• Security over business assets (or a general security)
• Personal guarantees from founders/directors
• Covenants (rules you must comply with while the loan is outstanding)

This can be a good fit when you’ve got predictable revenue and you’re confident you can service repayments without strangling cashflow.

Convertible Note (Debt That Can Convert Into Shares)

A convertible note starts as debt, but instead of being repaid in cash like a normal loan, it’s designed to convert into equity later (usually at your next priced funding round).

Most convertible notes include concepts like:

• Interest (often accrues and converts into shares too)
• Maturity date (a deadline where something happens if conversion hasn’t occurred)
• Conversion triggers (e.g. a qualifying equity raise)
• Discount to the next round’s share price
• Valuation cap (a maximum valuation used for conversion)

Because the note is a legal promise to either repay or convert, the drafting needs to be precise. If you’re using a convertible note, you’ll want the terms to reflect how your next raise is likely to happen, and what should occur if it doesn’t.

SAFE Note (Not Debt, But A Right To Future Shares)

A SAFE (Simple Agreement for Future Equity) is generally not a loan. There’s typically no interest and no maturity date. Instead, the investor pays now in exchange for the right to receive shares later if/when certain events occur (like a priced funding round).

It’s also worth noting that a SAFE isn’t a specific statutory concept under New Zealand law (it’s a market-style document that originated overseas), so it’s important that the agreement is properly tailored for your company, your cap table, and how you’re raising under New Zealand’s legal framework.

SAFE notes can feel founder-friendly because there’s usually no repayment pressure - but they still have real dilution consequences, and the conversion maths can get complicated if you do multiple SAFEs with different caps or discounts.

In New Zealand, you’ll still want a properly tailored agreement for your raise, rather than relying on assumptions from overseas precedents. If a SAFE is the right fit, a SAFE note that matches your cap table and funding strategy is the safest way to move forward.

When Does A Startup Loan Make Sense (And When Does It Hurt)?

Loans can be useful, but they’re not always startup-friendly. A lender usually cares about repayment ability and downside protection - while startups often need breathing room to experiment, pivot, and invest in growth before revenue stabilises.

Loans Can Work Well If:

• You have reliable revenue (or strong contracted income) and can service repayments.
• You’re funding a clear ROI activity (equipment, inventory, fit-out, expansion).
• You want to avoid equity dilution and keep the cap table clean.
• You’re comfortable offering security or giving a personal guarantee (if required).

Loans Can Be Risky If:

• Your cashflow is tight or unpredictable (repayments can become a constant stress).
• You’re pre-revenue and the only option involves heavy personal guarantees.
• A default could give the lender strong enforcement rights (including against secured assets).

One practical point founders sometimes miss: taking on “simple debt” now can affect your next equity round. New investors will often ask what liabilities exist, whether there’s security registered, and whether loan terms could block a future raise.

If you’re considering secured borrowing, it’s also worth thinking about whether any security interest should be formally documented and registered. For many New Zealand businesses, that means considering whether to register a security interest (for example, on the PPSR) - but it’s not automatic in every scenario and will depend on the structure of the deal and the assets involved.

How Do Convertible Notes Work In New Zealand (In Plain English)?

Convertible notes are popular for early-stage raises because they can be quicker than a full equity round, while still giving investors an upside path into shares.

Here’s the typical flow:

1) You Raise Now, Price Later

Instead of negotiating a valuation today, you raise funds now and agree that the investor will convert into shares later - most commonly at your next priced round, where a new investor sets the valuation and share price.

2) The Note Converts On A Trigger Event

A common trigger is a “qualifying financing” (e.g. you raise at least $X in new equity). When that happens, the note converts into shares in that round.

The conversion price is usually better than what the new investors pay, because the noteholder gets either:

• a discount (e.g. 15–25% off the round price), and/or
• a valuation cap (so they convert as if the valuation was no higher than the cap).

3) If The Trigger Never Happens, You Need A Plan

This is where founders can get caught out. What happens if you don’t raise a priced round before maturity?

Convertible notes commonly deal with this by setting out outcomes like:

• repayment (sometimes at lender’s option)
• conversion at an agreed price/cap
• extension of the maturity date
• conversion on a sale of the business (an exit) with a defined return

If your document is vague here, you risk disputes at exactly the wrong time - when the business is under pressure and you’re trying to raise again.

4) Interest And Maturity Aren’t “Minor Details”

Interest and maturity can sound like technicalities, but they drive real outcomes. For example:

• Interest may increase dilution if it converts into shares.
• A short maturity date can force you into renegotiation (or repayment) before you’re ready.
• If repayment is possible, the note may behave like “real debt” in the worst-case scenario.

This is why we usually recommend treating convertible notes like what they are: a legal and financial instrument that needs to match your actual fundraising plan, not just a template.

How SAFE Notes Compare (And Why They’re Not Always “Simpler”)

SAFE notes are often marketed as quicker and cleaner than convertible notes because they don’t involve debt features like interest and repayment.

That can be true - but only if you keep the overall fundraising strategy tidy.

Why Founders Like SAFE Notes

• No maturity date (less pressure to “finish” a round by a deadline).
• No interest (less dilution creep over time).
• Often fewer moving parts than a full convertible note.

Where SAFE Notes Can Create Issues

• Cap table complexity: multiple SAFEs with different caps/discounts can make it hard to model your next round.
• Investor expectations: if the SAFE doesn’t clearly explain outcomes on exits, wind-downs, or down-rounds, you may get pushback later.
• Governance confusion: SAFE holders are not shareholders yet, but they may still expect information rights or involvement.

In other words: a SAFE can reduce legal friction up front, but it can increase “cap table friction” later if it’s not structured carefully.

It’s also worth remembering that any fundraising has legal overlay - including how offers are made and what statements are communicated to investors. If you’re raising broadly (not just with a small group of people you already know), it’s important to consider the Financial Markets Conduct Act 2013 and how exemptions may apply. A good agreement helps, but it doesn’t replace careful process.

What Terms Should You Watch Closely In Convertible Notes And SAFEs?

If you’re a founder, the negotiation isn’t just about how much money you raise - it’s about what your business could look like after conversion.

Here are some of the big terms we suggest you pay close attention to.

Valuation Cap

A valuation cap protects the investor if the company grows quickly. The lower the cap, the more equity they’ll typically receive on conversion.

From your perspective, a cap needs to be realistic. If it’s too low, you might be giving away more of the company than you intended for the amount raised.

Discount Rate

The discount is the “reward” for investing early. Common discounts are around 10–25%.

Discounts are often easier to accept than very low caps, but they still affect dilution, especially if the round valuation is high.

Conversion Mechanics (What Exactly Converts, And Into What?)

Founders sometimes assume conversion is automatic and straightforward. In practice, you need to be crystal clear on:

• what share class the investor receives
• how the conversion price is calculated
• whether interest (if any) converts
• what happens if the next round is structured differently than expected

If you already have (or plan to adopt) a Company Constitution, make sure it doesn’t conflict with the note terms - particularly around share rights, issue procedures, and director/shareholder approvals.

Maturity Date And Repayment Rights (Convertible Notes)

Maturity dates are a major difference between convertible notes and SAFEs.

A founder-friendly convertible note often aims to avoid sudden repayment obligations that could sink the business. But investors also want clarity if the next round doesn’t happen.

A balanced approach might include extension rights, agreed conversion outcomes, or negotiated repayment triggers - depending on your stage and risk profile.

Security, Guarantees, And Ranking

Some convertible notes are unsecured, while others are secured against company assets (and sometimes supported by personal guarantees).

Security can be a deal-breaker for startups because it affects:

• your risk exposure if things don’t go to plan
• your ability to raise further capital (new investors may not want to sit behind a secured noteholder)
• control in a downside scenario (secured creditors often have stronger enforcement rights)

Information Rights And Control

Noteholders aren’t shareholders yet - but they may still request reporting obligations or veto rights over certain actions.

Be careful about agreeing to control rights that make it hard for you to run the business day-to-day (or raise the next round efficiently).

If you’re bringing on multiple investors, it can help to get your ownership and decision-making rules clear in a Shareholders Agreement so everyone understands how major decisions will be made after conversion.

What Documents Will You Usually Need For A Clean Raise?

Even when founders want the raise to be “quick”, it still needs to be properly documented. This protects you, protects the investor, and reduces the chance of headaches when you go to your next round.

Depending on whether you’re using a loan, convertible note, or SAFE note, common documents include:

• Term sheet covering key commercial terms (this helps align expectations before lawyers draft the long-form documents).
• Convertible note or SAFE note agreement with clear conversion triggers and outcomes.
• Board and shareholder approvals where required (this depends on your structure and constitution).
• Side letters (sometimes) for specific investor rights like information rights.
• Security documentation (if the investor is taking security) and registrations where appropriate.

If you’re negotiating the commercial points before drafting, having a well-structured term sheet can save time and prevent misunderstandings later. It also helps avoid situations where you think you’ve agreed on “the basics”, but the legal drafting reveals you were picturing two different deals.

And if your raise will convert into equity, it’s also worth thinking ahead to what your next share issue will look like - including whether you’ll need a Share Subscription Agreement for the priced round.

Key Takeaways

• Loans are straightforward debt and can suit businesses with predictable cashflow, but they may require security, guarantees, and regular repayments.
• Convertible notes are a popular startup funding tool in New Zealand because they let you raise now and convert into shares later, usually with a discount and/or valuation cap.
• SAFE notes typically aren’t debt (no interest or maturity), but they still create real dilution and can complicate your cap table if you do multiple SAFEs.
• For convertible notes, watch the maturity date, repayment rights, interest, and what happens if you don’t raise a priced round in time.
• For both convertible notes and SAFEs, the conversion mechanics (how the price is calculated, what shares are issued, and what happens on an exit) need to be clearly drafted to avoid disputes.
• Getting your legal foundations right early (including governance documents like your Company Constitution and Shareholders Agreement) can save you major headaches when the note converts or when new investors come in.

If you’d like help choosing between a loan, convertible notes, or SAFE notes - or you want your fundraising documents drafted or reviewed - you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.