SAFEs in Australia
Business Law: 08 July 2025
Author: Leisa Bayston - Our People
Simple Agreements for Future Equity (SAFEs) have emerged as a popular instrument for early-stage funding in Australia's startup ecosystem.
Originally developed by Y Combinator in Silicon Valley, SAFEs offer a streamlined approach to investment that avoids the complexities of debt instruments while providing investors with the right to receive equity in future financing rounds.
Unlike convertible notes, SAFEs are traditionally not debt instruments and therefore do not accrue interest. Instead, they represent a contractual right to receive shares in the company upon the occurrence of specific triggering events, typically a future equity financing round, acquisition, or IPO.
The Australian startup funding landscape has increasingly embraced SAFEs as an instrument for early investment. However, the word “simple” is misleading. The drafting of a SAFE is anything but standard in Australia. The original Y Combinator document didn’t include many concepts that now seem to pop up in almost all the SAFEs that come across my desk.
The risk of unintended consequences where parties haven’t reviewed the document thoroughly is high. This is compounded when parties issue numerous rounds of SAFEs. Any misjudgement or error can play out at the point in time you can least afford it, when you have a fundraise on your hands!
A SAFE should always be thoroughly reviewed by someone who understand the key financial terms and has seen it all before. This article sets out and explains the terms we often see in SAFEs and their impact on both founders and investors.
Key Financial Terms
When structuring a SAFE investment, several critical financial terms must be carefully considered and negotiated. These terms will significantly impact both the investor's potential returns and the founder's equity dilution.
The Discount Rate
The discount rate provides investors with preferential pricing in future equity rounds. This rate typically ranges from 10% to 30%, with 20% being common in the Australian market.
When a qualifying financing event occurs, investors with discount rights can purchase shares at a reduced price compared to new investors. For example, if new investors pay $10 per share in a Series A round, an investor with a 20% discount would pay only $8 per share for the same equity.
This mechanism ensures early investors are rewarded for their capital and risk-taking during the company's most vulnerable stage.
The discount rate effectively sets a floor price for the investor's conversion, regardless of how high the company's valuation climbs in subsequent rounds. However, it's important to note that discount rates typically work in conjunction with valuation caps, and investors usually receive the benefit of whichever term provides the better outcome.
In practice, the valuation cap often provides greater protection in high-growth scenarios, while the discount rate becomes more relevant in moderate valuation increases.
Valuation Cap
The valuation cap represents the maximum company valuation at which a SAFE investor's investment will convert to equity, regardless of the actual valuation in a future financing round.
This term is crucial for protecting investors from excessive dilution if the company achieves a very high valuation. For instance, if an investor contributes $100,000 under a SAFE with a $5 million valuation cap, and the company later raises funds at a $20 million valuation, the investor would still convert based on the $5 million cap. This means they would receive 2% of the company ($100,000 ÷ $5,000,000) rather than the 0.5% they would receive at the higher valuation.
The valuation cap serves as the investor's primary upside protection mechanism. Without it, early investors could find their percentage ownership severely diluted in high-valuation rounds, potentially making their investment economically insignificant despite the company's success.
In the Australian market, valuation caps typically range from $2 million to $20 million for seed-stage companies, depending on the company's sector, traction, and growth prospects.
Setting appropriate valuation caps requires careful consideration of the company's realistic growth trajectory and market conditions. Caps set too low may result in excessive dilution for founders, while caps set too high may not provide meaningful protection for investors. Australian companies often benchmark their valuation caps against recent comparable transactions in their sector and stage.
Pre-Money vs Post-Money
The distinction between pre-money and post-money SAFEs fundamentally affects how investor ownership is calculated and how future dilution impacts existing SAFE holders.
Pre-Money SAFEs calculate the investor's ownership percentage based on the company's valuation before the new financing round. Under this structure, all SAFE investors (including those from previous rounds) are subject to dilution when new SAFEs are issued. This creates a "dilution cascade" where earlier investors see their potential ownership reduced with each subsequent SAFE issuance.
Post-Money SAFEs fix the investor's ownership percentage based on the company's valuation after their investment, providing protection against dilution from future SAFE investors. In a post-money structure, if an investor receives 10% of the company, they maintain that 10% regardless of additional SAFEs issued before the qualifying financing event.
Post-money SAFEs provide more certainty for investors but can create more dilution for founders, particularly if multiple SAFE rounds occur before an equity financing.
Recent market trends in Australia show increasing adoption of post-money SAFEs, particularly among institutional investors who prefer the certainty and predictability they provide. However, founder-friendly investors and those focused on building long-term relationships may still prefer pre-money structures that create better alignment between all parties' interests.
Maturity Date
While traditional SAFEs are designed to remain outstanding indefinitely until a conversion event occurs, some investors now negotiate for maturity provisions that establish a specific deadline for resolution. These provisions typically appear in SAFEs with maturity periods ranging from 18 months to 3 years from the investment date.
When a SAFE reaches its maturity date without a qualifying conversion event, several outcomes may be triggered:
Automatic Conversion: The SAFE may convert to equity at a predetermined valuation, often using the valuation cap as the conversion price. This provides certainty for both parties but may result in conversion at terms less favourable than those available in a future financing round.
Repayment Option: Some maturity provisions require the company to repay the original investment amount, potentially with accrued interest or a premium. This transforms the SAFE into a quasi-debt instrument and can create cash flow pressure for startups that may not have the capital for repayment.
Extension or Renegotiation: The agreement may allow for automatic extension periods or require renegotiation of terms. This provides flexibility but can create uncertainty and additional transaction costs.
The inclusion of maturity dates fundamentally alters the risk-return profile of SAFEs for both investors and companies. For investors, maturity provisions provide protection against indefinite investment periods and ensure some form of resolution. For companies, these provisions create additional pressure to achieve financing milestones and may force conversion or repayment at inopportune times.
Companies should carefully consider the implications of maturity dates, particularly in relation to their fundraising timeline and cash flow projections. The maturity period should align with realistic expectations for achieving subsequent financing rounds while providing investors with reasonable timeline certainty. Australian companies typically model various scenarios to understand the potential impact of maturity provisions under different growth trajectories and market conditions.
Additional Rights and Provisions
Beyond the core financial terms, SAFEs may include various additional rights that provide investors with ongoing involvement and protection during the investment period.
Most Favoured Nation (MFN) Rights ensure that if the company grants more favourable terms to future SAFE investors, existing SAFE holders automatically receive those improved terms. For example, if a later investor receives a lower valuation cap or higher discount rate, MFN rights would upgrade earlier investors to these better terms. This provision protects early investors from being disadvantaged by subsequent fundraising on superior terms.
Pre-emptive Rights grant SAFE investors the right to participate in future financing rounds to maintain their percentage ownership. These rights typically activate upon conversion and allow investors to purchase their pro-rata share of new equity issuances. Pre-emptive rights help prevent dilution and ensure committed investors can continue supporting the company's growth.
Major Investor Rights apply to SAFE holders whose investments exceed a specified threshold. These investors may receive enhanced rights such as:
· information access;
· consent rights over certain corporate actions;
· preferential treatment in future rounds; or
· board observer rights to attend board meetings without voting rights.
Expense Reimbursement provisions require the company to cover reasonable legal and due diligence costs incurred by investors, particularly in larger SAFE rounds. While amounts are typically capped, these provisions can create additional costs for cash-constrained startups and should be carefully negotiated.
Financial Information Rights entitle SAFE investors to receive regular financial updates, typically quarterly or annually. This may include management accounts, financial statements, budget forecasts, and key performance metrics. Information rights help investors monitor their investment and provide appropriate support to the company.
The inclusion of these additional rights can significantly impact the complexity and cost of SAFE agreements. While they provide important protections and benefits for investors, they also create ongoing obligations for companies and may reduce some of the administrative simplicity that makes SAFEs attractive.
Closing
One of the key operational advantages of SAFEs is their flexibility in the closing process. There is no need to have a single initial closing for multiple investors in a SAFE financing because each investor receives a self-contained, stand-alone SAFE. The company and each investor can sign the SAFE whenever they are ready to close, and the investor should transfer to the company the purchase price of the SAFE at that time.
This rolling close capability allows companies to access capital as soon as individual investors are ready to commit, rather than waiting for all investors to simultaneously complete their due diligence and documentation. This flexibility can be particularly valuable for cash-constrained startups that need immediate access to funds.
Following each SAFE closing, the company's records should be updated to reflect the issuance of the SAFEs. This includes updating the company's cap table to show the outstanding SAFE investments, maintaining a register of SAFE holders.
Conclusion
The key financial terms discussed in this article - discount rates, valuation caps, pre/post-money structures, maturity provisions - all interact to create the overall economic framework of the investment. Understanding these interactions and their implications for different scenarios is crucial for both founders and investors.
Success with SAFEs requires balancing the competing interests of simplicity and protection, speed and thoroughness, and founder control with investor rights. Australian companies that invest time in understanding these instruments and seeking appropriate professional advice will be better positioned to use SAFEs effectively as part of their overall funding strategy.