In Australia, across early and growth-stage funding, convertible notes, SAFEs and warrants are rarely used in isolation. They are typically layered over time – sometimes deliberately, sometimes opportunistically, as founders raise capital in stages before a larger priced equity round.
Having examined each instrument individually in the earlier articles in this series, it is equally important to understand how each instrument operates together. The practical consequences of capital raising often emerge not from the terms of a single instrument, but from the way multiple instruments interact within a company’s capital structure.
This is where capital stack planning becomes critical in startup capital raising in Australia.
Capital Stack Snapshot: How These Instruments Work Together
Convertible notes, SAFEs and warrants are often used together in startup capital raising in Australia, particularly across early and growth stages.
- SAFEs and convertible notes are commonly used early to defer valuation and raise capital quickly
- Multiple instruments may accumulate, creating deferred dilution that only becomes visible at conversion
- Priced equity rounds act as a reset point, converting earlier instruments into shares and crystallising dilution
- Warrants and option pools can sit alongside these instruments, affecting fully diluted ownership and investor negotiations
Understanding how these instruments interact is critical to maintaining a clean cap table, managing dilution and aligning with future investors
No Capital Raising Instrument Operates in Isolation
In practice, most startups and scaleups move through funding in phases. A SAFE may be issued to secure early capital. A convertible note may follow as a bridge. Warrants may be granted alongside venture debt or to strategic investors. A priced round then occurs, converting earlier instruments into equity.
Each step feels discrete at the time it is taken. However, these instruments accumulate. They sit in the capital stack together and shape what happens at the next equity event.
A founder assessing a single SAFE or convertible note in isolation may see limited immediate dilution. But once multiple instruments are layered, the combined effect may be more complex than anticipated.
Understanding how those instruments converge at conversion is essential to managing dilution and capital structure outcomes in startup capital raising.
The Priced Equity Round as the Structural Reset
For most companies, a priced equity round is the moment where earlier flexibility becomes fixed equity.
At that point:
- Convertible notes convert into shares, typically at a discount and/or subject to a valuation cap.
- SAFEs convert according to their cap or discount mechanics.
- Warrants may become exercisable or remain on issue sitting alongside or above the new equity.
- A new class of preference shares is introduced, often with liquidation preference, anti-dilution protection and governance rights.
The priced round effectively crystallises the capital stack.
Where multiple instruments have been issued on differing terms, this process can become negotiation-heavy and technically complex. In practice, our capital raising lawyers often see cap tables become difficult to reconcile where instruments have been issued on inconsistent terms.
Importantly, new lead investors will typically review the existing stack carefully. They will assess not only the number of shares on issue, but the number of shares that will be issued on conversion, the rights attaching to those shares, and any overhang created by outstanding warrants or options.
The interaction between alternative financing instruments and the incoming equity round is therefore central to capital raising strategy in Australia.
Layering and Deferred Dilution
One of the most common structural features of alternative financing is deferred dilution.
When a SAFE or note is issued, dilution is not immediately visible in the share register. Instead, it is deferred until a future conversion event. When multiple instruments are issued over time, each with its own valuation cap, discount rate or capitalisation definition, the cumulative impact may only become clear once a priced round is imminent.
This can arise in several ways:
- Multiple SAFEs issued at different valuation caps.
- Convertible notes with differing discount rates or maturity profiles.
- Instruments referencing inconsistent definitions of “fully diluted capitalisation”.
- Notes and SAFEs operating alongside an employee share option pool.
- Warrants granted in connection with debt facilities.
Individually, each instrument may appear straightforward. Collectively, they can create what is often described as a “dilution overhang” – a volume of equity that will be issued on conversion but is not yet reflected in the current share register.
From a structuring perspective, the key issues are not mechanical complexity alone. They include:
- Whether earlier investors receive materially different economic outcomes based on cap and discount sequencing.
- Whether conversion calculations interact in unexpected ways.
- Whether a new lead investor will require adjustments before committing capital.
These are not inherent flaws in SAFEs, notes or warrants. They are structural consequences of layering instruments without consistent modelling.
Example: How Instruments Accumulate in Practice
To illustrate how these instruments interact, consider a simplified example:
A company raises:
- $500,000 under SAFEs at a $5 million valuation cap.
- $1 million under a convertible note with a 20% discount and a $6 million cap.
- Venture debt with attached warrants representing 5% of the company on a fully diluted basis.
- At the time each instrument is issued, the immediate dilution appears limited. No shares have yet been issued, and the cap table may remain relatively simple.
However, when the company later completes a $10 million Series A round:
- The SAFEs convert at the $5 million cap.
- The convertible note converts at the more favourable of the discount or cap (in this case, likely the cap).
- The warrant holder retains the right to acquire additional shares, increasing the fully diluted position.
- A new class of preference shares is issued to incoming investors.
- At that point, the combined effect of the earlier instruments becomes visible.
The founders may find that a significantly larger portion of the company has been allocated than anticipated when each instrument was considered individually. Earlier investors may receive different effective pricing outcomes depending on their entry point and terms. The new lead investor will assess the fully diluted position, including all conversion and exercise rights, when determining valuation and ownership.
This is not unusual. It is the expected result of layering alternative financing instruments over time. The key issue is whether that outcome has been modelled and understood in advance, rather than emerging for the first time during a priced round.
Typical Capital Stack Timeline in Startup Capital Raising
In practice, these instruments are often introduced progressively as a company moves through funding stages. Our capital raising lawyers in Australia often see:
- Pre-seed / Seed – SAFEs and early convertible notes are used to raise capital quickly while deferring valuation.
- Bridge to priced round – Additional convertible notes may be issued to extend runway ahead of a Series A, often with tighter caps or discounts.
- Growth stage – Warrants are introduced alongside venture debt or strategic investment, adding further rights to acquire equity.
- Priced equity round (e.g. Series A) – Earlier instruments convert, new preference shares are issued, and the capital stack is reset on a fully diluted basis.
At each stage, instruments are layered rather than replaced. The cumulative effect becomes visible only when conversion occurs.
Sequencing and Negotiation Impact
The order in which instruments are issued can influence negotiation dynamics at later stages.
For example, a bridge convertible note issued shortly before a Series A may carry a cap or discount that materially affects the fully diluted position of founders and earlier investors. If that bridge capital is raised urgently, the commercial trade-offs may not be fully modelled at the time.
Similarly, where warrants have been granted alongside venture debt, new equity investors may factor the warrant coverage into their valuation discussions. The existence of outstanding rights can influence both pricing and governance negotiations.
Stacked instruments may also affect signalling. A company that has raised several short-term bridge instruments may face closer scrutiny from incoming investors than one that has raised a clean, consolidated round.
From a legal perspective, consistency across documentation is equally important. Differences in capitalisation definitions, treatment of option pools, or inclusion of certain securities in conversion calculations can become points of friction during a priced round. This is one of the key reasons why early engagement with experienced capital raising lawyers is critical.
These issues are not unusual. They are part of the commercial reality of staged capital raising. However, they reinforce that alternative financing tools operate within a broader structural framework.
Planning the Capital Stack
Effective capital stack management is less about avoiding alternative instruments and more about planning their interaction. The sequencing outlined above highlights where issues typically arise, and this section focuses on how to manage them in practice.
In practice, this typically involves:
- Modelling ownership on a fully diluted basis before issuing additional instruments.
- Scenario modelling conversion outcomes at different valuation levels.
- Maintaining consistency in capitalisation definitions across documents.
- Considering how option pools and warrants will sit alongside convertible instruments.
- Reviewing potential exit waterfall outcomes early, rather than only at transaction stage.
Cap table management software such as Cake Equity, Carta or Pulley may be able to assist with maintaining accurate records and potentially scenario modelling. However, software alone does not resolve structural inconsistency. The commercial and legal assumptions embedded in each instrument still require careful alignment.
Our capital raising lawyers regularly assist founders and investors to model and rationalise stacked instruments ahead of a priced round, ensuring that conversion mechanics, dilution outcomes and governance positions are understood before negotiations commence.
Conclusion
Convertible notes, SAFEs and warrants are flexible and widely used capital raising tools. Their individual mechanics are generally well understood. The greater complexity arises when they operate together within a company’s capital stack.
As companies move from early-stage funding to larger priced equity rounds, the interaction of those instruments becomes visible and commercially significant.
Clear modelling, consistent documentation and early structuring advice can help ensure that today’s flexibility does not become tomorrow’s friction.
If you are considering issuing alternative financing instruments, or preparing for a priced round where existing instruments will convert, our capital raising lawyers in Australia regularly advise on capital structuring and would be pleased to assist. Feel free to reach out our to our capital raising lawyers here.
