If you’re raising a seed round for your Australian startup, you’ve almost certainly encountered two instruments: the convertible note and the SAFE (Simple Agreement for Future Equity). Both let you raise capital without agreeing on a valuation upfront, and both convert into equity when you close a priced round down the track. But they’re structurally different, and those differences matter — for your balance sheet, your relationship with investors, and your flexibility as a founder.
We’ve previously covered how SAFEs work. This post compares the two instruments side by side, with a focus on what’s relevant for Australian founders and investors.
The Core Difference: Debt vs Equity
The fundamental distinction is simple. A convertible note is a loan. A SAFE is not.
Under a convertible note, an investor lends money to your company. That loan accrues interest and has a maturity date — a deadline by which the company must either convert the note into equity (usually triggered by a qualifying funding round) or repay the principal plus interest. It sits on your balance sheet as a liability.
A SAFE, by contrast, is a contractual right to receive equity in the future. There’s no loan, no interest, no maturity date, and no repayment obligation. The investor pays money now in exchange for the right to convert that investment into shares when a trigger event occurs — typically a priced equity round, acquisition, or IPO.
This distinction drives most of the practical differences between the two instruments.
Interest and Maturity: The Pressure Question
Because a convertible note is debt, it accrues interest — typically between 2% and 8% per annum in current market practice. That interest usually compounds and converts into additional equity alongside the principal at the conversion event. On a $500,000 note at 5% over 18 months, that’s an extra $37,500 converting into shares. It’s not catastrophic, but it’s additional dilution that founders sometimes overlook.
More significantly, convertible notes have a maturity date — usually 18 to 24 months from closing. If your company hasn’t triggered a conversion event by that date, the investor can technically demand repayment. In practice, most angel investors won’t call in the loan and destroy the company they invested in. But the legal right exists, and it creates leverage. Maturity date negotiations — extensions, automatic conversion at maturity, or renegotiated terms — are a common source of friction between founders and noteholders.
SAFEs avoid this entirely. No interest accrues, and there’s no deadline. If you don’t raise a priced round for three years, the SAFE just sits there. This is why SAFEs are often described as more “founder-friendly” — they remove the time pressure and the risk of a debt repayment demand.
The trade-off is that this is less attractive to some investors. A SAFE investor has no mechanism to force a return if the company never raises a priced round and never exits. Their money could sit in limbo indefinitely. Convertible notes give investors a fallback, which is why more conservative investors — particularly those outside the startup ecosystem — tend to prefer them.
Conversion Mechanics: Caps and Discounts
Both instruments use the same basic tools to reward early investors at conversion: valuation caps and discounts.
A valuation cap sets a maximum effective valuation at which the investment converts. If an investor puts in $100,000 on a SAFE with a $5 million cap, and your Series A prices the company at $20 million, the investor’s SAFE converts as though the company were worth $5 million — giving them significantly more shares than a Series A investor putting in the same amount.
A discount gives the early investor a percentage reduction on the Series A share price. A 20% discount means the SAFE or note holder pays 80 cents for every dollar of share price that Series A investors pay.
Some instruments include both a cap and a discount, with the investor receiving whichever produces more shares. Others include only one. Market practice in Australia has broadly tracked US norms: a valuation cap without a discount is the most common structure for SAFEs, while convertible notes more frequently include both.
Post-Money vs Pre-Money SAFEs
One development that Australian founders need to understand is the shift from pre-money to post-money SAFEs.
Y Combinator’s original SAFE template (2013) was a pre-money instrument — meaning the valuation cap referred to the company’s value before the SAFE investment was included. This made it harder for both founders and investors to calculate exactly how much of the company the SAFE holder would own after conversion.
In 2018, Y Combinator introduced the post-money SAFE, where the valuation cap includes the SAFE investment itself. This makes the maths cleaner: a $1 million investment on a $10 million post-money cap equals exactly 10% ownership at conversion (before any new money from the priced round). The post-money SAFE has become the dominant standard globally.
The catch for founders is that post-money SAFEs are more dilutive than pre-money SAFEs at the same cap, particularly when you issue multiple SAFEs. Each post-money SAFE dilutes the founders (and each other), and the cumulative effect of several SAFEs at the same cap can be larger than founders expect. If you’re raising $2 million across four SAFEs at a $10 million post-money cap, you’ve already allocated 20% of the company before your Series A investors write a cheque. Run the numbers carefully.
Australian Regulatory Considerations
Both convertible notes and SAFEs are “securities” for the purposes of Chapter 6D of the Corporations Act 2001 (Cth), which means issuing them is subject to disclosure requirements unless an exemption applies. In practice, most seed-stage startups rely on the exemptions in section 708 — particularly the “small scale offerings” exemption (no more than 20 investors in a 12-month period, raising no more than $2 million) or the “sophisticated investor” and “professional investor” exemptions.
Getting the exemption right matters. If you issue convertible notes or SAFEs without a valid exemption and without a prospectus or other disclosure document, the offers may be voidable, and you could face regulatory consequences. This is an area where the cost of getting it wrong substantially exceeds the cost of getting advice upfront.
One Australian-specific nuance worth noting: because convertible notes are debt instruments, they may technically constitute “debentures” under the Corporations Act. The Act imposes specific requirements on debenture issuers, including the appointment of a trustee. In practice, most startup convertible notes are structured to fall outside these requirements (or rely on exemptions), but it’s another reason to have the documentation reviewed by a lawyer who understands the Australian regulatory framework — not just a US template downloaded from the internet.
SAFEs, as equity instruments, don’t raise the debenture issue. But they’re still securities, and the same disclosure exemptions need to be satisfied.
Tax Treatment
The tax treatment of convertible notes and SAFEs in Australia is an area where the characterisation as debt or equity has real consequences.
Interest on a convertible note is generally deductible for the company and assessable income for the investor. The conversion of a note into shares may trigger capital gains tax implications depending on the terms. For investors, the original investment amount typically forms part of the cost base of the shares received on conversion.
SAFEs sit in a greyer area. The ATO hasn’t issued comprehensive guidance on the tax treatment of SAFEs specifically, and the answer depends on how the SAFE is characterised — as a financial arrangement under Division 230 of the Income Tax Assessment Act 1997, as an equity interest, or as something else. The tax treatment can differ for the company and the investor, and it can depend on the specific terms of the SAFE.
For both instruments, founders should get tax advice before issuing — particularly if you’re raising from a mix of Australian and international investors, where withholding tax obligations may also be relevant.
When to Use Each
There’s no universally correct answer, but the general pattern in the Australian market is:
SAFEs work well when you’re raising a small seed round from angels and early-stage investors who are familiar with the instrument, you want to close quickly with minimal legal costs, and you don’t want debt on your balance sheet. They’re the dominant instrument for pre-seed and early seed rounds in 2026, particularly for founders who’ve been through accelerators or are raising from the startup-native investor community.
Convertible notes make more sense when your investors prefer the additional protections (interest, maturity date, repayment right), you’re raising from more traditional investors or family offices, or the round is structured as bridge financing between priced rounds where a defined timeline is appropriate. Some investors also prefer convertible notes because they’re a more established instrument with clearer legal precedent in Australia.
In either case, get the documentation right. Both instruments are deceptively simple in concept but can create real problems if the conversion mechanics, trigger events, or regulatory compliance aren’t properly addressed. A well-drafted five-page SAFE or ten-page convertible note is one of the cheapest pieces of legal work in a startup’s lifecycle — and one of the most consequential.
Conclusion
Convertible notes and SAFEs both solve the same problem: letting you raise money before you and your investors agree on what your company is worth. The choice between them comes down to how much structure and protection your investors need, how much complexity you’re willing to take on, and whether you want debt on your books.
For most Australian seed rounds in 2026, SAFEs are the default starting point. But defaults aren’t always right — and understanding why the alternative exists will help you make a better decision for your specific situation.
If you’re preparing for a seed round and want advice on structuring your raise, get in touch.
