Convertible notes and SAFE notes for Australian startups: documentation and accounting

Convertible notes and SAFE notes (Simple Agreement for Future Equity) are common instruments for early-stage Australian companies raising capital before a priced equity round. Both let the company defer the question of valuation; both convert into equity on a future event; both have specific accounting and tax consequences. Choosing between them and documenting them correctly matters more than founders sometimes assume.

Convertible notes are debt instruments. The note has a face value (the amount lent), an interest rate (often nominal, between 5 and 8 per cent), a maturity date (typically 18 to 24 months from issue), and conversion mechanics. On a "trigger event" (usually a qualifying capital raise above a defined threshold), the note converts into equity at a discount to the new round price and subject to a valuation cap. If no trigger event occurs by maturity, the note either converts at a default rate or becomes repayable.

A SAFE note gives the investor a contractual right to receive shares on a trigger event. It is usually treated as equity-like, but its tax and accounting classification depends on its terms. SAFE notes have no interest, no maturity date, and convert on a defined trigger event with a discount and cap mechanism similar to a convertible note. SAFE notes were originally a US instrument; Australian variants have evolved to address local accounting and tax treatment differences. From the company side, SAFE notes are simpler to document; from the investor side, they offer less protection than a convertible note (no interest, no maturity).

ASIC implications. Convertible note issues do not require ASIC lodgement at the time of issue; the company is not issuing shares yet. On conversion, a Form 484 must be lodged within 28 days of the share issue. SAFE notes follow the same pattern: no ASIC lodgement on issue, Form 484 on conversion. The company share register must be updated to reflect the new shareholdings at conversion.

Tax considerations. Convertible note interest may be deductible to the company depending on the structure; thin capitalisation rules can apply for foreign-controlled companies. Conversion is CGT event C2, but a capital gain or loss on converting a convertible note is generally disregarded and the shares take a cost base based on the note (section 130-60 ITAA 1997), with different rules where the note is a traditional or qualifying security. Because a SAFE is a right to future shares rather than debt, the holders CGT cost base and acquisition timing differ. Specialist tax advice before issue is essential, particularly for foreign investors.

Documentation. A convertible note agreement is typically 12 to 25 pages, covering the principal amount, interest, maturity, conversion mechanics, cap, discount, investor rights, and standard boilerplate. A SAFE note is typically 5 to 10 pages, with similar substantive provisions but lighter boilerplate. Side letters covering investor rights (information rights, board observation rights, pre-emption on future raises) are common alongside both instruments.

Practical advice for advisers. Use a convertible note where the investor wants downside protection through interest accrual and a maturity date. Use a SAFE note where the investor accepts equity-like risk and wants documentation that closes faster. In either case, ensure the constitution supports the share class that will be issued on conversion, and have the cap, discount, and trigger event defined clearly. CoSec Partners can support the corporate-secretarial work around convertible note and SAFE note conversions, including Form 484 lodgement and share register updates.