SAFE and Convertible Loan are the same challenge startups in Armenia often face : raising funds without giving up equity too soon. Globally, two tools are used for this: SAFE agreements (Simple Agreement for Future Equity) and convertible loans. Until recently, Armenia’s laws did not clearly allow these instruments, leaving founders and investors uncertain.
Today, reforms in the Civil Code recognize convertible loan agreements: money comes in as a loan, and later, if agreed, it converts into shares. It’s not equity at the start, but it can become equity down the line. SAFE, while widely used abroad, is still new and not yet fully regulated in Armenia.
For startups, investors, and consultants, knowing the difference between SAFE agreements in Armenia and convertible loans is essential. Each has different tax and legal consequences under the taxation system in Armenia and Armenia’s IT tax policies. This article explains those differences and what they mean in practice.
SAFE (Simple Agreement for Future Equity): A SAFE is an agreement where an investor gives money today in exchange for the right to receive shares in the future. It is not a loan, there is no interest, no fixed maturity date, and no repayment obligation. Globally, SAFE is widely used by early-stage startups that want quick funding without negotiating valuation or complex loan terms.
Convertible Loan / Convertible Debt / Convertible Note: A convertible loan is a debt instrument. The investor provides funds as a loan, usually with interest and a maturity date. At a trigger event—such as the next financing round or a company sale, the loan converts into shares. If conversion doesn’t occur, repayment is normally required.
How this fits into Armenia’s system: Before recent reforms, Armenia’s legal framework did not clearly allow either of these instruments. Startups and investors had to rely on workarounds, which created risk and uncertainty under the taxation system in Armenia. With the new rules, convertible loans vs SAFE agreements in Armenia are no longer treated the same way: convertible loans now have legal recognition, while SAFEs remain less clearly defined. These changes, combined with the changes in Armenian tax law, make it essential for founders and investors to understand which structure they are using and how it will be treated.
When using convertible loans vs SAFE agreements in Armenia, one of the main risks is valuation. At the point of conversion, the share price determines how much equity the investor receives and how much the founders are diluted. Without careful drafting, this can create disputes or unexpected loss of control for the founding team.
Another issue is foreign currency. Many investors provide funding in USD or EUR, but Armenian law requires clarity on how conversion into shares is calculated. The IC Armenia reforms propose that convertible loans in foreign currency be converted using the average exchange rate on the date the conversion request is made, but exchange rate fluctuations still create risk for both sides.
Conversion conditions also require careful planning. Triggers such as company performance, new financing rounds, or investor rights must be clearly written into the agreement, and often require updates to the company’s charter and other corporate documents. These details make professional support critical: involving tax and management consulting experts or an accounting firm in Armenia can help startups avoid mistakes that could otherwise block a conversion or create tax and governance problems later.
Finally, it is worth noting that many Armenian startups end up opening a Delaware C-Corp to attract international investors, since U.S. corporate structures are simpler and more familiar to global funds. While practical, this trend is considered damaging for Armenia’s startup ecosystem, as it pushes companies to incorporate abroad instead of building equity structures locally.
For startups, the main advantage of convertible loans vs SAFE agreements in Armenia is the ability to raise early-stage funding without giving up equity immediately. This creates breathing room for growth, but founders must plan carefully for the eventual conversion, which may require restructuring the company’s charter and shareholding.
Another important aspect in Armenia is employee equity participation. Employee Stock Option Plan in Armenia differs from SAFE agreements, but it’s another important way to increase the motivation in working at the company. The main difference between SAFE and EPOS is that EPOS is a corporate governance tool when SAFE is a financing instrument
For investors, these instruments provide flexibility. They allow participation in future upside if the company succeeds, but the level of protection varies. A SAFE does not guarantee repayment if the company fails, while a convertible loan, being a debt instrument, often provides stronger protections through interest, maturity dates, or repayment clauses.
For freelancers in Armenia or small business owners who may become stakeholders through these agreements, the key issue is taxation. Incomes and expenses are recognized in accordance with IFRS and IAS, so they need clarity on how conversion is treated under the taxation system in Armenia, what portion counts as income, and how profit or capital gains are taxed. Without proper planning, what looks like an opportunity could create unexpected tax liabilities.
The new rules on convertible loans vs SAFE agreements in Armenia create opportunities, but also risks. Legal drafting must be precise: agreements need to fully align with the updated Civil Code, Company Law, and Tax Code to remain enforceable and compliant.
Beyond the legal side, accounting and tax planning are just as important. A poorly structured agreement can result in unexpected tax liabilities or unfavorable treatment under the taxation system in Armenia. For startups and investors, this can mean losing access to incentives or facing disputes during conversion.
This is where professional support matters. An experienced accounting firm in Armenia can help navigate compliance, while specialists in tax and management consulting provide guidance on structuring, valuation, and tax-saving strategies. As one of Armenia’s trusted business consulting companies, Profin Consulting also assists with shareholder negotiations and investor relations to make sure deals are both practical and secure.
The first step is to decide whether a SAFE agreement or a convertible loan is more suitable, taking into account the company’s stage, investor expectations, and the level of control each side is willing to accept.
When drafting a convertible loan agreement, every key detail must be specified clearly: conversion triggers, share class to be issued, treatment of foreign currency, conversion price or rate, and the timing of conversion. These points reduce uncertainty and protect both founders and investors. Founders should also negotiate key terms like interest rate, maturity date, and conversion discount explicitly, and be prepared to either repay or convert at maturity. Since loans are formal debt, securing board or shareholder approval may also be necessary.
When using a SAFE, founders must be equally careful. Choose the right template (such as YC’s standard SAFE or a compliant local adaptation), and make sure conversion events like equity financing, exit or dissolution are clearly defined. Decide whether to include a valuation cap, a discount, or both, as these will directly affect investor equity later. Since SAFEs are not debt, it’s important to communicate this clearly to investors and maintain a SAFE ledger to track who invested, how much, and under what terms.
It is also essential to align agreements with Armenian law. Company charters and corporate documents may need amendments to reflect new convertible loan provisions once the law is fully enacted. Without this alignment, agreements risk becoming unenforceable.
Tax planning cannot be overlooked. Founders and investors must understand when interest is considered paid, how conversion impacts income or profit tax, and how to properly report transactions under the taxation system in Armenia. Because incomes and expenses are recognized under IFRS and IAS, careful structuring is required to avoid misreporting.
Finally, investors themselves should consider the different risk profiles. With SAFEs, they need to check valuation caps or discounts carefully, and understand that there is no repayment guarantee. With convertible loans, they should confirm conversion mechanics, enforceability of maturity and interest provisions, and clarify their priority in liquidation.
Engaging with an experienced partner such as Profin Consulting early ensures proper legal and tax structuring, compliance with Armenia’s IT incentives, and minimized risk. As a leading accounting services provider in Armenia, Profin provides the tax and management consulting expertise needed to structure deals effectively and protect both startups and investors.
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