A SAFE (a Simple Agreement for Future Equity) is usually not drafted as a loan. It gives an investor the right to receive shares later, usually at your next priced round, at a price set by a valuation cap, a discount, or both; it carries no interest and usually no repayment date, though many SAFEs also pay the holder an amount on a sale or winding up before conversion, and its accounting and tax treatment depends on its terms. A convertible note is a loan: the company owes the noteholder the principal, usually with interest, until the note converts into shares or is repaid at maturity. Both instruments dilute existing shareholders once they convert, and neither one's cap, discount or interest rate is itself a valuation of the company.
Start-Up Valuations, a division of Valuation Group Pty Ltd, prepares valuations for Australian startups that reflect SAFEs, convertible notes and the fully diluted cap table.
Sources last checked 27 September 2026. See Sources below for each source's version and date.
Last updated 28 September 2026
Standard start-up valuation $3,495 + GST
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What is a SAFE, and how does it convert?
- SAFE (Simple Agreement for Future Equity)
An agreement under which an investor pays the company money now in exchange for the right to receive shares later, typically at the company's next priced equity round, rather than shares on the day the SAFE is signed. It usually carries no interest and usually no maturity date forcing repayment. Its accounting and tax treatment depends on its terms and is a question for the company's accountant.
SAFE documents vary between templates. In our experience, versions used in Australia are often adapted from instruments drafted overseas. This guide describes mechanics that commonly appear, a valuation cap, a discount, or both, not any single template as the Australian standard. Read the actual document rather than assume a standard form.
Two mechanisms commonly appear:
- A valuation cap. A ceiling on the price used to work out how many shares the SAFE converts into. If the company's next priced round values it above the cap, the SAFE still converts as though the company were valued at the cap, so the SAFE holder receives more shares for the same money than a new investor buying in at the round's own price. Whether the cap is measured against the pre-money or the post-money valuation, and which shares count in that calculation, is set by the document's own definitions, and it changes how much the founders are diluted; see our guide to pre-money and post-money valuation.
- A discount. The SAFE converts at a stated reduction to the price per share paid by new investors in the priced round, rather than at the round price itself.
Where a SAFE carries both a cap and a discount, the document usually says which applies. In our experience, this is often whichever mechanism produces the lower conversion price for the SAFE holder, but it is always a question of what the specific SAFE says, not a rule to assume.
Is a SAFE's valuation cap the value of the company?
No. In our view, a valuation cap is a ceiling on the price used at conversion, agreed between the company and the SAFE investor as a term of that specific agreement, not a valuation of the company. The ATO has not published a rule that a recent round price is the market value of a company's ordinary shares 1. Our guide to a recent capital raise as valuation evidence goes through why a priced number from a raise and a share's market value are not automatically the same figure.
A cap is set through negotiation between the founders and the investor, often before the company has much of a trading history to value against. Treating it as if it were the outcome of a valuation, rather than a ceiling the parties agreed to, is a common source of confusion once a company later needs an actual valuation, for example for an employee share scheme grant or a tax event. In our view, a cap also carries more weight as valuation evidence closer to the date it was agreed, and progressively less as time passes and the company's circumstances change, because it reflects the negotiating positions and market conditions of that earlier date rather than the valuation date.
Where does an unconverted SAFE sit before it converts?
Where a startup valuation starts from enterprise value, it bridges to equity value by adding surplus cash and subtracting debt and debt-like items. In our view, calibration to a recent round and a net tangible assets approach generally work at equity or per share level rather than through this bridge. LI 2025/19 Method Two prescribes its own formula: net tangible assets less preference share obligations, divided by ordinary shares plus participating preference shares 2. An unconverted SAFE has to be placed somewhere when a bridge is used. In our view, the right treatment depends on its terms and how likely conversion is at the valuation date, not a fixed rule: each unconverted SAFE or note is treated either as a claim deducted in the bridge, or as converted into shares in the fully diluted count, never both and never left out. A SAFE with no priced round in sight can sit closer to a contingent, equity-like claim than a liability. One that is about to convert under a round already under negotiation can behave, for the purpose of the bridge, much like the shares it is about to become. This is a judgement call made and documented at the time of each valuation, not a mechanical formula.
What is a convertible note, and how is it different from a SAFE?
- Convertible note
A loan to the company that converts into shares if specified conditions are met, commonly a future priced round, a maturity date, or another trigger named in the note deed. Unlike a SAFE, a convertible note is legal debt from the day it is issued: the company owes the noteholder the principal and, where the note carries one, interest, until the note either converts into shares or is repaid.
Because a convertible note is debt, it commonly carries an interest rate that accrues until conversion or repayment, and a maturity date by which the note must either convert or be repaid. In our view, an unconverted note is generally treated as a creditor claim, but whether it is treated as a deduction in the equity bridge or as converted into shares in the fully diluted count depends on its terms and how likely conversion is at the valuation date, never both and never left out. Its ranking against other creditors and shareholders in a winding up also depends on its terms, including any security or subordination, and is a question for the company's lawyers, not a general assumption. The deed itself, not a general assumption, is what a valuation needs to work from.
What happens if a convertible note reaches maturity before it converts?
If a note reaches its maturity date without a conversion trigger having occurred, and without an extension being agreed, the company may need to repay the principal, plus any accrued interest, in cash. That can put pressure on a company that expected the note to convert rather than be repaid. Some note deeds address this directly, with an automatic conversion at maturity, an extension mechanism, or a default interest rate. Whether any of these apply is a matter of what the specific deed says, worth checking well before the maturity date arrives, not after.
What can happen at a convertible note's maturity date
Fictional numbers. Not market evidence.
Larkspur Robotics Pty Ltd, a fictional company and not a client, issued a convertible note to Fictional Seed Fund for $150,000, with interest accruing until conversion or repayment, and a maturity date 24 months after issue. By the maturity date, Larkspur had not completed a priced round, so no conversion trigger had occurred. Under the note deed, the company owed Fictional Seed Fund the $150,000 principal plus $15,000 of accrued interest, a total of $165,000, unless the parties agreed otherwise before that date.
Repaying $165,000 in cash immediately would have used most of Larkspur's remaining runway. Instead, the board and Fictional Seed Fund agreed, under a variation permitted by the deed, to extend the maturity date by a further 12 months on the same terms. Nothing was converted, valued, or written down as part of that extension. This is one illustration of how a maturity date can force a decision; the actual terms, and what a specific deed allows, depend entirely on that document.
Standard start-up valuation $3,495 + GST
Delivery: agreed before commencement. Delivery time starts once payment and all required information have been received.
How do a SAFE and a convertible note actually compare?
| Feature | SAFE | Convertible note |
|---|---|---|
| Legal character | Usually not drafted as a loan; a right to receive shares later | A loan to the company until it converts or is repaid |
| Interest | Usually none | Usually accrues until conversion or repayment |
| Maturity date | Usually none forcing repayment | Usually present; conversion or repayment is due by that date |
| What sets the conversion price | A valuation cap, a discount, or both, as the document states | A valuation cap, a discount, or both, as the document states |
| If no priced round happens | The agreement's own terms govern what, if anything, is triggered | The note may fall due for repayment, or convert or extend under the deed's own terms |
| Position before conversion | Depends on its terms; not a loan, but may carry a payout right on a sale or winding up | A creditor claim, but its ranking against other creditors depends on its terms, including any security or subordination |
How does dilution actually work when a SAFE converts?
Here is how a valuation cap changes the number of shares a SAFE investor receives, using a fictional example with fictional figures worked through step by step.
How a valuation cap changes what a SAFE converts into
Fictional numbers. Not market evidence.
Example Robotics Pty Ltd, a fictional company and not a client, has 8,000,000 ordinary shares on issue to its founders and a further 1,000,000 shares reserved, but not yet issued, in an option pool, a fully diluted total of 9,000,000 shares. Before any priced round, Fictional Seed Fund invests $200,000 under a SAFE with a valuation cap of $4,500,000. Applied to the 9,000,000 fully diluted shares on issue at the time the SAFE was signed, that cap works out to $0.50 a share, so the SAFE converts into 400,000 shares ($200,000 divided by $0.50).
Some months later, Example Robotics agrees a priced seed round with a new investor, Fictional Growth Capital, at $0.75 a share. Applied to the company's 9,000,000 existing shares, that round values the company at $6,750,000, above the SAFE's $4,500,000 cap. Because the round's own price values the company above the cap, the SAFE converts at the capped price of $0.50 a share rather than the round's $0.75, so Fictional Seed Fund receives the same 400,000 shares regardless of the round price. Whether a cap is measured against a pre-money or a post-money figure, and which shares count in that calculation, is set by the document's own definitions, and it changes this arithmetic; see our guide to pre-money and post-money valuation. The cap table below shows the company before the round, and after the SAFE has converted and the new round has completed.
Illustrative. Fictional numbers.
Fictional numbers. Not market evidence.
The founders and the option pool are diluted by both the SAFE's conversion and the new round. The number of shares the SAFE converts into is set by its own terms, not renegotiated at the time of the round, though the share issue itself still goes through the board and any approvals the constitution or shareholders' agreement requires. This example shows the SAFE converting into the same preference class Fictional Growth Capital receives in the round, sometimes called a shadow series, which is how many commonly used SAFEs are drafted; the class a specific SAFE converts into is set by its own document, and it affects which class value applies to those shares, not the ordinary share value. This is one illustration of the mechanism, not a formula. The actual number of shares any real SAFE converts into depends on that document's own cap, discount and definitions, and on the company's fully diluted share count at the time.
Where do SAFEs and convertible notes fit in a startup valuation?
A valuation involving SAFEs or convertible notes on the cap table still needs its own basis and unit of value named up front, because the purpose decides both. For the ESS start-up concession, the test uses market value: for a share, the discount is measured against the share's market value; for a right, the exercise price is compared with the market value of an ordinary share, both at the time the interest is acquired 3. For the ESS start-up concession market value test only, LI 2025/19 approves two methods a company may be able to use if the instrument's conditions are met 2, 4; our guide to how ESS valuations work explains when they apply. For a capital raise, the relevant question is usually enterprise or equity value bridging into a price for the class being issued; see capital raise valuations and our guide to pre-money and post-money valuation. For a shareholder or founder transfer, the basis can be whatever the constitution or shareholders' agreement defines, which is not always market value, and the tax consequences of the same transfer may still turn on market value in its ordinary meaning 5; see founder share transfers. The unit being valued also needs naming, an ordinary share, one class, a parcel, an option, total equity or enterprise value, because an instrument that has not yet converted changes the fully diluted count behind whichever unit is in question.
Whichever purpose applies, every outstanding SAFE, convertible note and unissued option pool share needs to be accounted for before any per share figure is worked out. In our view, each unconverted SAFE or note is treated either as a claim deducted in the bridge from enterprise value to equity value, or as converted into shares in the fully diluted count, depending on its terms and how likely conversion is at the valuation date. It is never both, and it is never left out, because either mistake changes the value attributed to each existing share. A prescribed method such as LI 2025/19 Method Two sets its own share count rather than a general fully diluted count 2. Where preference shares are also involved, how total equity value allocates across classes is a separate question again, covered in our guide to ordinary and preference shares.
Start-Up Valuations, a division of Valuation Group Pty Ltd (ABN 48 702 469 252), prepares valuations for Australian startups on this work for the company, its board or its advisers, to support decisions such as an ESS grant, a capital raise or a restructure. Reports are prepared for the company, its board or its advisers. They are not advice to any shareholder, noteholder, employee or investor on whether to acquire, exercise, hold, sell or accept anything, and Valuation Group Pty Ltd does not hold an Australian Financial Services Licence.
What a valuer needs to work through your SAFEs and convertible notes
We ask for these after engagement, through your private matter link, never through this site.
- Every SAFE, convertible note and warrant document: caps, discounts, maturity dates, interest terms and conversion triggers
- The fully diluted cap table, including unissued option pool shares and any instruments still to convert
- Term sheets and subscription agreements for each round: date, price, class, amount and investor identity
- The constitution and shareholders' agreement, for any valuation, transfer or pre-emption clauses that apply
- Board minutes recording any resolution about pricing, a raise, a SAFE, a note or a valuation
Common mistakes worth avoiding
- Treating the price implied by a priced round, or a SAFE's valuation cap, as the value of every share on the register, including ordinary shares
- Using the last round price as the ordinary share value for an ESS grant without adjusting for class rights, timing and circumstances
- Leaving an unconverted SAFE or convertible note out of the valuation altogether, neither deducted in the bridge nor counted as converted, or leaving the unissued option pool out of the fully diluted count
- Deducting an unconverted SAFE or note as a liability in the bridge and also adding its conversion shares to the fully diluted count, which double counts it
- Assuming a note's maturity date will look after itself, rather than checking the deed's conversion, extension and repayment terms in advance
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Frequently asked questions
Is a SAFE the same thing as a loan?
No. A SAFE is usually not drafted as debt: it carries no interest and, unlike a loan, does not fall due for repayment on a fixed date. It gives the investor a right to receive shares later, on the terms the document sets out, and those shares dilute existing shareholders once the SAFE converts. A convertible note is different: it is a loan until it converts or is repaid, and until then it is generally treated as a creditor claim, though its ranking against other creditors and shareholders depends on its own terms, including any security or subordination.
Does our SAFE's valuation cap tell us what our company is worth?
No. In our view, a cap is a ceiling on the price used at conversion, agreed as a term of that specific agreement, not a valuation. The ATO has not published a rule that a recent round price is the market value of a company's ordinary shares 1. See our guide to a recent capital raise as valuation evidence.
What happens if our convertible note matures before we complete a priced round?
It depends on the note deed. Commonly, the company may need to repay the principal and any accrued interest in cash, unless the deed provides for an automatic conversion, an extension, or another mechanism, or the parties agree an extension separately. Check the specific deed well before the maturity date, rather than assuming a market standard.
Do SAFEs and convertible notes matter for an ESS valuation, even before they convert?
Often, yes. In our view, an outstanding SAFE or note that is likely to convert may need to be reflected in the fully diluted share count, because it may convert into shares, though a prescribed method such as LI 2025/19 Method Two sets its own share count rather than a general fully diluted count 2. For the ESS start-up concession market value test only, LI 2025/19 approves two methods a company may be able to use if the instrument's conditions are met 2, 4; our guide to how ESS valuations work explains when they apply.
If a SAFE has both a cap and a discount, which one applies?
That depends entirely on the specific document. In our experience, many SAFEs state that whichever mechanism produces the lower conversion price for the investor applies, but this is a term of the individual agreement, not a rule that applies to every SAFE. Read the document rather than assume.
Sources (5)
- Market value (ESS in detail hub). Australian Taxation Office. QC82046 (no date shown). Accessed 27 Sep 2026. S010 ab
- LI 2025/19 Legislative Instrument. Australian Taxation Office; Federal Register of Legislation. Made 9 Sep 2025; registered 11 Sep 2025 (F2025L01085); commenced 1 Oct 2025. Accessed 27 Sep 2026. S003 abcde
- Income Tax Assessment Act 1997, section 83A-33. Commonwealth (text via ATO Legal Database). Current text as displayed 27 Sep 2026; inserted by No 105 of 2015. Accessed 27 Sep 2026. S006
- LI 2025/19, Explanatory Statement. Australian Taxation Office. 9 Sep 2025. Accessed 27 Sep 2026. S004 ab
- Market valuation for tax purposes (Guide). Australian Taxation Office. Current at February 2025. Accessed 27 Sep 2026. S009