Term sheet, SAFE, convertible note — three familiar startup fundraising instruments, each with a different legal “wrapper” in Vietnam. Misunderstanding their legal nature can cost investors their conversion rights or leave startups in breach of securities offering procedures. This article explains the key clauses of each instrument under current Vietnamese law.
1. Term sheet: usually non-binding, but never sign blindly
A term sheet is normally a non-binding memorandum of economic terms: valuation, investment amount, ownership percentage. However, certain clauses in a term sheet are binding and deserve close reading:
- Confidentiality: the duty to keep negotiation information secret;
- Exclusivity: the startup agrees not to negotiate with other investors for a period — breach can trigger penalties;
- Governing law and dispute resolution;
- Costs: who bears legal costs if the deal collapses.
A common trap: signing a thin term sheet and assuming the “deal is closed” — all economic terms must be finalised in the definitive investment agreements (share subscription agreement, shareholders’ agreement…).
2. SAFE: a civil agreement, not shares or bonds
The SAFE (Simple Agreement for Future Equity) is a US instrument with no dedicated framework under Vietnamese law. Under Vietnamese law it is treated as a civil agreement under the freedom-of-contract principle (Articles 385-386, Civil Code 2015). Consequences:
- Money paid in is not yet capital contribution at signing — the investor is not yet a member/shareholder;
- Key clauses must be spelled out: valuation cap, discount rate, conversion triggers (next financing round, M&A, IPO), and what happens if no trigger occurs (refund? extension?);
- When the SAFE converts into shares/capital — especially for foreign investors — the procedures for foreign capital contribution and share purchase under Article 21 of the Investment Law 143/2025/QH15 and Article 76 of Decree 96/2026/ND-CP must be completed before conversion, where registration is required (foreign ownership exceeding 50%, conditional market-access sectors…).
3. Convertible notes: two different legal wrappers for JSCs and LLCs
(a) Joint-stock companies: convertible bonds via private placement under Articles 128-129 of the Enterprise Law 2020 — offered without mass media to fewer than 100 investors (excluding professional securities investors); eligible buyers of privately placed convertible bonds are strategic investors or professional securities investors. Procedure (Article 129): the company approves the placement plan; discloses information before each tranche and notifies the Stock Exchange at least 01 working day before the intended placement date; discloses results within 10 days of the tranche closing.
(b) Limited liability companies: may issue bonds — Article 46(4) (multi-member LLCs) and Article 74(4) (single-member LLCs) of the Enterprise Law 2020 permit LLCs to issue bonds; private bond placements must comply with Articles 128–129 of the Enterprise Law 2020. In startup practice, a “convertible note” in an LLC is usually structured as a loan agreement with conversion rights into capital contribution (a civil agreement), with clear conversion, valuation and maturity terms.
4. Beneficial owner transparency: a new duty from 01/7/2025
Law 76/2025/QH15 (amending the Enterprise Law, effective 01/7/2025) introduces the concept of beneficial owner (Article 4(35)) plus duties to declare, keep and provide information. New investors must supply complete information for the company to comply — a compliance point many startups miss when fundraising.
5. Investor checklist: clauses never to skip
- Anti-dilution: protecting ownership percentage against down-round issuances;
- Liquidation preference: payout order on dissolution or sale;
- Veto rights: material matters requiring investor consent;
- Founder commitments: vesting schedules, non-compete, full-time dedication;
- Governing law and dispute resolution: arbitration or courts, Vietnamese or foreign law.
6. Frequently asked questions
Q: Should a Vietnamese startup use the original Y Combinator SAFE template?
A: Not as-is. The YC template is drafted under US law; have counsel adapt it to Vietnamese law, especially the conversion mechanics, investment registration procedures and dispute resolution.
Q: Does a foreign investor signing a SAFE need an investment licence upon conversion?
A: It depends. If conversion pushes foreign ownership over the threshold or into a conditional sector, registration with the investment registration authority is required before conversion (Article 21, Investment Law 143/2025; Article 76, Decree 96/2026).
Q: Can a binding term sheet be enforced?
A: Only the clauses the parties agreed to be binding (confidentiality, exclusivity…) can be enforced; economic terms marked non-binding cannot.
Is your startup preparing a fundraising round and needs a legal review of the documents? Contact us for advice.
This article was prepared by the FLAW AI Legal Council. Content is pending QA Council review before submission for approval; information is for reference only and does not replace legal advice for your specific case.
