SAFE Note Guide for Australian Startups

What Is a SAFE Note?

A SAFE Note (Simple Agreement for Future Equity) is a contract between an investor and a company. It is not a loan. Instead, it is a promise to give the investor shares in the company at a later date. This usually happens during a future funding round known as a "qualified financing".

In Australia, this instrument has become a popular way for startups to raise capital early on. It allows founders to get money quickly without having to decide on a specific company valuation right away. Valuations can be difficult and expensive to determine for a new business. A SAFE kicks that decision down the road.

The investor provides funds now. In return, they get the right to acquire shares later. The number of shares they get depends on the terms of the SAFE. Typically, the investor gets a discount on the share price or a limit on the valuation (a cap). This rewards the investor for taking a risk on the company early.

While this concept originated in the United States with Y Combinator, it has been widely adopted in the Australian startup ecosystem. Accelerators like Startmate and Antler Australia use a version of this document adapted for Australian law. It is now a standard tool for "pre-seed" and "seed" funding.

When to Use This Document

You should use a SAFE Note when you need to raise capital to grow your business but are not ready for a full priced equity round. This is common in the earliest stages of a startup's life.

You might be a tech founder building a prototype or a tradie looking to scale a new service model. If you need money to get to the next milestone, a SAFE is a good option. It is faster and cheaper than a full equity round. It involves less legal negotiation than a convertible note, which is a debt instrument.

A SAFE is particularly useful when raising from angel investors, friends, family, or early-stage funds. These investors are betting on your potential rather than your current numbers.

However, it is not right for every situation. If your company has a steady operating history and clear revenue, you might prefer a traditional loan or a priced equity round. You should also be careful if you are issuing equity to employees. Issuing a SAFE to an employee triggers specific tax rules under the Employee Share Scheme provisions.

Finally, you must consider how much money you are raising. If you are raising a very large amount from institutional investors, they may prefer standard equity. But for rounds under $1 million, the SAFE is often the most efficient choice.

Key Sections and Required Elements

A well-drafted Australian SAFE Note must contain specific sections to be legally effective and compliant. Using a standard investment agreement template helps ensure you do not miss these.

Valuation Cap and Discount

These are the two most important financial terms. The Valuation Cap is the maximum price at which your investor's money converts into shares. For example, if the cap is $4 million and you later sell the company at a $10 million valuation, the investor still converts as if the company were worth $4 million. They get more shares for their money.

The Discount gives the investor a percentage reduction on the share price during the next round. A standard discount in Australia is usually 20%. In Australia, investors often ask for both a cap and a discount. The investor usually gets whichever calculation results in a lower share price.

Conversion Trigger (Qualified Financing)

The SAFE must define exactly when it turns into shares. This is usually the "Qualified Financing". This is a future equity round where the company raises a minimum amount of money.

You must set a specific dollar amount for this trigger. It might be $750,000 or $1,000,000. This prevents the SAFE from converting during a small, internal bridge round. You want the conversion to happen during a substantial round that establishes a fair market price.

Maturity Date (Long Stop Date)

Unlike the original US version, Australian SAFE notes almost always have a Maturity Date. This is also called a Long Stop Date. It is usually set 24 months after signing.

If the company has not raised money or been sold by this date, the SAFE must be dealt with. The options might include repaying the investor or converting into shares at a pre-agreed price. Australian investors generally require this date. They do not want their money trapped indefinitely without a clear exit.

Most Favored Nation (MFN) Clause

This clause protects early investors. It states that if you issue a new SAFE to another investor with better terms, the early investor gets those better terms too.

For example, if you give the first investor a cap of $6 million and the second investor a cap of $4 million, the first investor can demand their cap be lowered to $4 million as well.

Investment Warning Statement

If you are relying on the "Small Personal Offer" exemption, this section is mandatory. You must include the specific words required by the Corporations Regulations. The warning tells the investor that they are not receiving a disclosure document. It warns them that they may not have all the information they need to make an informed decision.

How to Write a SAFE Note (Step by Step)

Writing a SAFE Note requires attention to detail. You must follow a strict process to ensure it is legally binding in Australia.

Step 1: Determine Your Investor Class

Before you draft the document, you must classify your investors. This dictates which legal warnings you need.

• Sophisticated Investors: These investors have net assets of $2.5 million or gross income of $250,000 for the last two years. They must provide a certificate from a qualified accountant. You can raise unlimited amounts from them without a disclosure document.
• Retail Investors: These are standard investors, often friends and family. To raise money from them without a full disclosure document, you must rely on the "Small Personal Offer" exemption. This limits you to raising $2 million in 12 months from a maximum of 20 investors.

Classify your investors on the cover sheet of the document.

Step 2: Draft the Core Terms

You need to negotiate the key numbers. Decide on the Valuation Cap, the Discount percentage, and the Maturity Date. You should also decide on the "Minimum Target" for the conversion trigger.

Use clear language. Define the "Company" and the "Investor" at the start. Ensure the governing law is set to an Australian state or territory, usually New South Wales or Victoria. Do not use US law templates without modification.

Step 3: Include the General Warning Letter

If you are using the Small Personal Offer exemption, you must attach a General Warning Letter. This is a specific form. It must state: "The offer of these securities is limited to persons who are the subject of a personal offer."

Without this document, the exemption is invalid. You could be in breach of the Corporations Act.

Step 4: Check the Constitution

Before issuing the SAFE, look at your company's Constitution. It may contain "pre-emptive rights". These are rights that require existing shareholders to be offered new shares before anyone else. If your Constitution has this, you may need to pass a special resolution to approve the SAFE. Otherwise, you might not be able to issue the shares later.

Step 5: Execute the Document

The signing process is critical. Under Section 124 of the Corporations Act, a company must execute documents correctly.

For a company, this requires signing by two directors, or by one director in the presence of a witness. If you do not follow this rule, the SAFE may not be legally binding. The investor should also sign.

Step 6: Keep Records (Privacy Act)

Once signed, you hold the investor's personal information. You must comply with the Privacy Act 1988. Store their details securely. Only use the information for the purpose of the investment agreement.

Common Mistakes to Avoid

Many Australian founders make simple errors that can cause big problems later.

Raising From Too Many Retail Investors

This is the most common mistake. The Small Personal Offer exemption has a strict limit. You can only take money from 20 retail investors in a 12-month period.

If you take money from 21 retail investors without a disclosure document, you have breached the law. This applies even if the 21st person only invests a small amount like $500. You must track your investor numbers carefully.

Ignoring Employee Share Scheme Rules

Founders often issue SAFEs to employees as a bonus. This is risky. The Australian Taxation Office (ATO) treats this as an Employee Share Scheme (ESS).

If you do not include the specific tax warning statements and adhere to the "3-month holding period" restriction, the employee could be taxed upfront on the value of the equity. This can create a large tax bill for an employee who has not received any cash yet. You should use a specific Employee Option Plan instead.

Using US Law

Using a standard American Y Combinator template is dangerous in Australia. US templates do not include the required Investment Warning Statements. They might not have a Maturity Date, which Australian investors expect.

They also rely on US legal concepts that do not translate to Australian courts. If a dispute arises, enforcing a contract governed by foreign law is expensive and difficult.

Forgetting the MFN Clause

Sometimes founders give better terms to later investors because the company is doing better. They forget this affects the earlier SAFE holders. This causes friction. Always account for the MFN clause so you know exactly how many shares you will need to issue.

Legal Considerations (AU)

SAFE Notes sit in a complex area of Australian corporate law. You must understand the regulatory environment.

Corporations Act 2001 (Cth)

The main piece of legislation is the Corporations Act. You cannot just offer securities to the public. You must have a license or an exemption.

• Section 708AA (Small Personal Offers): This is the most common exemption for startups. It allows you to raise up to $2 million in 12 months. You are limited to 20 retail investors. You must provide a warning statement.
• Section 708 (Sophisticated Investors): If you raise money from sophisticated investors, you do not need a disclosure document. However, you must verify their status. You need a certificate from a qualified accountant confirming they meet the asset or income tests.

Australian Securities and Investments Commission (ASIC)

ASIC regulates fundraising. They provide Regulatory Guide 228 (RG228). This guide explains the disclosure requirements.

ASIC does not require you to provide a detailed Information Memorandum for a Small Personal Offer. However, best practice suggests you should. Providing a clear summary of your business, risks, and financials helps defend you against claims of misleading conduct under Australian Consumer Law.

Taxation (ATO)

The ATO looks at SAFEs carefully. They generally view a SAFE as a "right to acquire shares".

There can be tax consequences if the SAFE is not set up correctly. If the terms allow the investor to get their money back instead of taking shares, the ATO might view it as a debt instrument. This could lead to Div 7A issues if the investor is a shareholder or associate.

To avoid problems, ensure the conversion is automatic upon a trigger event. It is best practice to obtain a private ruling from the ATO if you are unsure about the tax treatment of your specific SAFE terms.

State Variations

While the Corporations Act is federal, some matters are governed by state law. For example, the process for lodging changes to your company register happens at a state level. Most SAFE notes choose the law of New South Wales or Victoria as the governing law. This is standard because most major law firms are based there. Ensure you have the right legal advice for your specific state.

Frequently Asked Questions (preview)

Is a SAFE Note a loan?

No, a SAFE Note is not a loan. It is an agreement to issue shares in the future. It does not have an interest rate or a repayment schedule in the same way a bank loan does.

Do I need a lawyer to draft a SAFE?

While templates exist, it is highly recommended to have a lawyer review your SAFE. They can ensure you have the correct warnings for the Corporations Act and that the terms are fair for your specific situation.

What happens if my company never raises money again?

If the Maturity Date passes and you have not raised money, the SAFE will dictate what happens next. Usually, the investor has the right to be repaid or to convert into shares at a set price. You need to negotiate this term carefully before signing.

Can I use a SAFE for a trade business?

Yes. SAFE notes are increasingly used for scalable businesses outside the tech sector. If you have a high-growth trade business model, micro-VCs and angel investors may be open to using a SAFE.

How much equity does a SAFE investor get?

You will not know the exact percentage until the next funding round. The investor funds convert into shares at that time. The price they pay is determined by the Valuation Cap and the Discount in your SAFE document.