Guide
SAFE vs Convertible Note (Australia)
A founder-friendly comparison for Australian pre-seed and seed rounds — how each works, what it costs on your cap table, and when to pick one over the other.
Both SAFEs and convertible notes let a Sydney founder take investor money now and defer the "what is this company worth" question to the next priced round. The differences are small but they matter — and picking the wrong one can add interest to your cap table, or trigger tax at the worst possible moment.
The One-Line Difference
A SAFE is a contractual right to receive shares in the future. A convertible note is a loan that converts to shares in the future. That single distinction cascades into every practical difference below.
Side-by-Side
| Feature | SAFE | Convertible Note |
|---|---|---|
| Legal nature | Contractual right | Debt instrument |
| Interest | None | Yes — usually 5–8% p.a. |
| Maturity date | None | Usually 18–24 months |
| Repayment on maturity | N/A — never becomes repayable | Technically yes; usually rolled or converted |
| Valuation cap | Common | Common |
| Discount | Common (10–25%) | Common (10–25%) |
| Investor priority in wind-up | Below creditors, above ordinary shareholders | Ranks as a creditor |
| Complexity | Lower — usually 6–8 pages | Higher — usually 15–25 pages |
| Typical legal cost | $1,500–$3,000 | $3,000–$6,000 |
How Each Converts
Both instruments convert on the next "qualifying" priced round — usually defined as an equity raise above a threshold (e.g. $1m). The conversion price is set by whichever gives the investor more shares:
- Discount: e.g. 20% off the priced round's price per share
- Valuation cap: e.g. treat the company as worth $5m regardless of the actual round price
Example: $250k SAFE with $5m cap and 20% discount. Next round prices the company at $10m post-money at $1.00 per share.
- Discount price: $0.80/share → 312,500 shares
- Cap price: $0.50/share (because $5m / $10m × $1.00) → 500,000 shares
- Investor gets the higher: 500,000 shares
When to Use a SAFE
- Small rounds ($100k–$1.5m) from angels or micro-VCs
- You want to close in days, not weeks
- You expect to raise a priced round within 18 months
- You do not want debt sitting on your balance sheet
When to Use a Convertible Note
- Investor specifically wants creditor priority (older / more conservative capital)
- Round has a hard maturity date the investor wants enforced
- You are not confident of a priced round within 24 months and want a repayment fallback
- Cross-border investors who are more comfortable with debt instruments
Australian Tax and ESIC Considerations
If your company qualifies as an Early Stage Innovation Company (ESIC), investors can access a 20% non-refundable tax offset and a 10-year CGT exemption — but only for equity issued at the time of investment. Standard SAFEs and convertible notes do NOT trigger ESIC benefits at signing; the benefit is deferred to the eventual conversion, and by then you may not qualify.
If ESIC eligibility is important to your investor, consider a priced round or a "Convertible SAFE" structured as immediate equity with a repurchase right. Get tax advice before issuing.
Cap Table Impact — The Real Cost
Founders routinely underestimate dilution from SAFEs and notes because the conversion happens at a future round. A useful rule of thumb: assume every SAFE dollar at your $5m cap will convert to shares as if you took a priced round at $5m today. Model it. If the answer scares you, raise a smaller round or push the cap up.
Frequently Asked Questions
Are SAFEs legal in Australia?
Yes. SAFEs are contractual instruments — there is no specific Australian legislation for or against them. They are widely used by Australian pre-seed and seed investors including Blackbird, Airtree, Startmate, and most angel networks.
Is a SAFE debt or equity in Australia?
Neither, cleanly. A SAFE is a contractual right to future shares. It is not debt (no repayment obligation, no interest) and not present equity (no shares issued until conversion). Treatment for accounting and ESIC purposes depends on the specific terms; get advice before issuing.
What is a valuation cap?
The maximum company valuation at which the SAFE or note converts to shares. Example: $5m cap. If the next priced round is at $10m post-money, the SAFE holder converts as if the company was worth $5m — effectively getting 2x more shares for their money than the new investors.
Do convertible notes accrue interest in Australia?
Yes — that is what makes them a note rather than a SAFE. Typical Australian rates are 5–8% p.a. simple interest, added to the principal at conversion. This slightly dilutes founders more than an equivalent SAFE.
Next Step
If you are preparing a round, see our Raising Capital service page, or read our startup lawyer guide. Book a 15-minute call to walk through your term sheet.
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