In the early rush to raise capital, many startups issue a series of convertible securities including SAFEs, KISSs, convertible notes, side letters, discount agreements and valuation caps, often across different rounds, timings, terms, and involve different investor expectations. What initially feels like a swift and flexible, founder-friendly fundraising sprint, can quickly evolve into a dilution time bomb. This is especially pronounced where founders use well-recognized non-Malaysian precedents, such as US Y-Combinator SAFEs, US KISS agreements, Singapore CARE, or Singapore KISS (2 types), without adapting them properly to Malaysian law or the company’s long-term equity architecture.
In this article, we list down a few common pitfalls to avoid when fundraising with multiple convertible instruments, which will only surface later on post-fundraising.
- Fragmented terms which create conflicting rights and inconsistent investor expectations
When multiple instruments are issued and negotiated with different investors, different terms may result. For example, having more than 1 type of SAFE with different conversion mechanics – some with valuation caps whiles others with discounts; some carrying board vetoes, some with broad MFNs, different reserved matters and/or voting rights (which technically should not even be granted to non-shareholders); each investor begins to expect different treatment.
These instruments often confer quasi-shareholder rights on investors who are not yet shareholders, creating confusion about entitlements and resentment when later investors obtain more favourable terms and control.
A common example we come across is when KISS notes are supplemented by full preferred-share rights that must apply upon the KISS’s conversion into preference shares. This includes detailed liquidation preferences, redemption rights, dividend rates and control elements. The kicker? These rights must apply even if the KISS holder does not lead nor even participate in the priced equity conversion round.
The mismatch between Malaysian corporate law and foreign templates exacerbates these issues. Instruments drafted with US-style conversion triggers or quasi-shareholder rights often prove difficult to implement cleanly under the Companies Act 2016, which restricts the form and timing of rights granted to non-shareholders. These inconsistencies surface most painfully at the point of conversion and can slow down the actual equity round significantly to the detriment and frustration of the many parties involved in the fundraising round.
- Cap table chaos: not knowing the true extent of future dilution
Another systemic problem is that founders under-estimate the compounding effect of multiple convertible instruments on their actual ownership. This is especially so if each instrument converts differently, at different valuation caps or discounts, typically with different seniority and timing. Startups that accumulate numerous SAFEs, notes, and side letters without modelling how these instruments convert collectively in a priced equity round will inevitably face this shock.
Founders entering a “Series” equity round may discover that the combined effect of all prior instruments results in far more dilution than anticipated. It is not uncommon for founders expecting to retain 60–70% pre-series rounds, to drop below simple majority of 50% once all conversion mechanics are reconciled.
- Complex conversions lead to disputes and delayed closings
When a priced round finally arrives, the conversion process becomes legally and mathematically complex. Excel tables containing complicated formulae buried deep below the surface may face disagreement even amongst the holders themselves, not to mention the incoming investors, each with differing and sometimes conflicting interests to protect.
Different instruments define “valuation cap”, “pre-money”, “post-money”, “liquidity event”, and “qualifying financing” in inconsistent ways and using words that somehow must translate into mathematical formulae. MFN clauses may require detailed comparisons and retroactive term matching. Some instruments require shareholder approvals that were never obtained. Others contain conditions that are incompatible with Malaysian corporate procedures.
Founder, current investors, existing investors and their lawyers may each interpret conversion formulas differently, leading to disputes over share entitlements, survival of rights, or the proper calculation of dilution. These disagreements frequently delay closing timelines, trigger renegotiations, and increase legal costs at a pivotal stage of the company’s growth…or when the cash runway is quickly running out. And no, it is not “the lawyer’s job” to ensure that all this is accurate.
How to Avoid This Pitfall
The first step is to adopt a cohesive fundraising strategy right from the get-go, rather than issuing instruments opportunistically. Founders should standardise terms across all SAFEs, notes, and convertible agreements within a targeted window period. Avoiding bespoke side letters and inconsistent exceptions reduces the risk of conflicting rights and unclear expectations.
Next, founders should maintain a living cap table model that simulates conversion outcomes across all outstanding instruments, and to get sign-offs from existing investors on their interpretation along the way prior to each issuance. This can be updated after each new issuance, allowing founders to anticipate dilution early, adjust terms accordingly and get alignment from all parties.
Where possible, early-stage instruments can be consolidated through a clean-up round or voluntarily converted before a major priced round. This creates alignment and transparency for incoming VC investors, who increasingly require a clean, coherent instrument history as part of their due diligence.
Finally, founders should prioritise Malaysia-tailored templates that fit within the regulatory and practical framework (including corporate secretarial practices and SSM requirements), for instruments intended to convert into Malaysian company shares. This avoids the structural friction and legal incompatibility that arises from US or SG templates with remedies or rights that cannot be implemented under Malaysian corporate law.
Conclusion
Convertible instruments are powerful, quick and ‘low fuss’ when used in early stages, but when layered inconsistently, they can create uncertainty, hidden dilution, and legal ambiguity that jeopardises and slows down future fundraises. By standardising terms, avoiding foreign templates that conflict with Malaysian law, and maintaining clear cap table modelling, founders can prevent unexpected dilution shocks and safeguard their long-term ownership strategy.
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This article was written by Shawn Ho (Partner) from Donovan & Ho’s corporate practice.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
