How Singapore CARE Funding Works

The Convertible Agreement Regarding Equity, commonly called CARE, is a Singapore law model for raising capital before a company and investor are ready to price an equity round. The investor pays the purchase amount in accordance with the agreement; signing and payment need not occur at the same moment unless the completed terms require that result. Depending on the trigger and alternatives selected in the executed agreement, the CARE may later convert into shares or give rise to another contractual outcome, such as repayment at the long stop date.

CARE forms part of version 2.0 of the Venture Capital Investment Model Agreements, or VIMA. The Singapore Academy of Law and the Singapore Venture and Private Capital Association developed VIMA as a suite of model documents for venture capital transactions in Singapore. CARE is a contractual template, not a statutory category or a fixed set of commercial terms.

What the parties agree

The parties complete and negotiate the CARE schedule and operative provisions. Relevant variables can include the purchase amount, valuation cap, discount rate or other discount mechanics, qualifying financing threshold, long stop date and the treatment of interest. Which variables apply depends on the alternatives retained in the executed document. The selected alternatives matter. There is no single set of economics that applies to every CARE.

A valuation cap supplies a valuation reference for a conversion calculation. It is neither a statement of the company's current value nor a ceiling on the valuation that may be agreed for the next priced round. It also does not, by itself, fix the investor's eventual ownership percentage. A discount mechanism instead reduces the relevant round price for conversion, but the document must be checked to see whether its stated percentage is expressed as a discount or as the percentage of the round price payable. Where the executed CARE applies both mechanisms, its formula determines which price is used.

The capitalisation definition is equally important. It determines how issued shares, options, reserved employee equity and other converting instruments enter the denominator. Two CAREs carrying the same valuation cap can produce different outcomes if their definitions or other terms differ.

Signing and funding

The company and investor sign the CARE and the investor transfers the purchase amount on the contractual funding date. The parties do not set the price per conversion share at that stage, and the funding itself does not place the investor on the company's register of members.

The company should check its constitution and existing investor documents, obtain the approvals and waivers required to enter into the CARE, and record the instrument. It should also maintain a fully diluted cap table that models the CARE alongside options and every other convertible instrument. If several angels are participating, our guide to Angel SPVs and cap table management explains the separate question of whether they should invest through one vehicle.

Conversion at an equity financing

A qualifying equity financing is a principal conversion trigger. If a round meets the definition and any threshold in the executed CARE, the instrument converts into the class of shares specified there, subject to the agreement and completion of the required corporate steps. The agreement's formula determines the conversion price and number of shares.

For example, terms that make the investor pay 80 per cent of the relevant round price produce the same economic result as a 20 per cent discount, subject to the agreement's definitions and formula. A valuation cap calculation can produce a different price. If the completed agreement makes both available, its selected provisions determine whether the investor receives the more favourable price. A cap and discount should not be assumed to operate together merely because both appear in model materials.

Corporate approvals and allotment

Under section 161 of the Companies Act, directors generally need the company's prior approval in general meeting before allotting conversion shares. Any statutory exception, and the scope and continuing validity of an approval, must be checked for the particular allotment. Pre-emption rights and reserved matters may require additional consents or waivers.

For a Singapore private company, ACRA states that the allotment takes effect when the electronic register of members is updated after the allotment filing. ACRA also requires the return of allotment to be filed within 14 days of the allotment. Because effectiveness depends on the register update, the filing should be coordinated as part of implementing conversion rather than treated as later housekeeping.

The long stop date

A CARE can include a long stop date. If no earlier financing or other trigger has occurred, the selected alternatives may provide for conversion, repayment or an election between stated outcomes. The precise entitlement, procedure and calculation come from the signed agreement.

A contractual repayment entitlement does not guarantee that cash will be available. Enforcement and recovery can be affected by the company's financial position, other creditor rights and insolvency law. The parties should model this outcome before signing.

Exit and winding up

CARE also deals with a sale, listing or other liquidity event before conversion, and with dissolution. An entitlement may be calculated by reference to the purchase amount, an equity conversion value or another formula, depending on the completed form.

These contractual payment provisions do not make the CARE secured. Unless separate security is created, signing the model instrument gives the investor no security interest. Legal priority, accounting classification and tax treatment must each be assessed on their own terms.

What founders should check

• the events that trigger conversion and any minimum financing threshold;
• the valuation cap, discount and capitalisation definition;
• the class and rights of the conversion shares;
• the treatment of options and other convertible instruments;
• the long stop, exit and dissolution outcomes;
• any interest, information or participation rights; and
• the approvals, waivers and ACRA filings needed to issue shares.

Founders comparing CARE with SAFE forms can read our companion article, CARE vs SAFE: Four Early Stage Funding Approaches Compared. Our transactional services overview explains how we support funding documentation and corporate approvals.

Conclusion

CARE lets a Singapore company raise capital before setting the price of a future equity round. Its practical effect comes from the completed terms, particularly the conversion formula, capitalisation definition, long stop alternatives and exit provisions. Founders should model those terms against their full cap table rather than relying on the CARE label alone.

Primary references reviewed for this article include the VIMA model agreements and CARE materials, the Singapore Companies Act 1967 and ACRA guidance on allotments of shares. Model forms and regulatory guidance can change. This article is general information, not legal, investment, accounting or tax advice.