Capital raising can feel complex, especially when investors start talking about convertible notes, Simple Agreements for Future Equity (SAFE) and warrants. These instruments have become standard across Australian startup and growth financing, offering businesses flexible ways to raise capital without immediately committing to a priced equity round.
As these tools become more common, understanding how they operate and when to use them is increasingly important. Our capital raising lawyers see these instruments regularly in practice, so we’ve drawn on those insights to help founders and growing businesses navigate them with more confidence.
This is our first article in our series on alternative financing instruments. It provides a helicopter view of convertible notes, SAFEs and warrants, each of which are tools that enable businesses to raise capital without immediately issuing shares or completing a full priced equity round. In later articles in this series, we take a closer look at each instrument – how it works, where it fits and why founders may choose one over another at different stages of growth. The series concludes with a comprehensive FAQ addressing common questions about dilution, investor preferences and what happens if a company never completes its next funding round. If you ever need advice tailored to your own raise, you’re welcome to contact us
Alternative Financing Instruments at a Glance
Convertible notes, SAFEs and warrants are three commonly used instruments in startup capital raising. While they all allow companies to raise funding without immediately completing a priced equity round, they operate in different ways.
- Convertible notes – debt instruments that may convert into shares when a specified event occurs, usually a future equity funding round.
- SAFEs (Simple Agreements for Future Equity) – contractual rights to receive shares in a future equity round, typically without interest or a maturity date.
- Warrants – rights, but not obligations, to purchase shares at a fixed price within a specified period.
Understanding how these instruments differ helps founders choose the structure that best aligns with their fundraising strategy and growth stage.
Why businesses use convertible Notes, SAFEs and warrants
Convertible notes, SAFEs and warrants are alternative investment instruments commonly used to bridge a company to its next equity round. Although they differ in design, they serve a similar purpose: enabling capital to move quickly when timing, market conditions or business priorities make a traditional equity round less practical or more time-consuming to complete.
Each instrument offers a different mechanism for managing how and when equity is issued, whether by deferring valuation, linking investor upside to future performance, or tying investment terms to later events such as a qualifying raise or exit. For founders, they can extend runway, bridge between funding rounds or bring strategic investors on board without immediately issuing shares or completing a priced equity round. For investors, they provide a structured pathway to participate in future equity with protections or incentives suited to the stage of investment.
They are widely used because they minimise the friction of a traditional equity round, which often requires extensive negotiation of shareholder rights, governance terms and long-form documents. These alternative instruments allow funding to close quickly, with more detailed terms addressed at a later stage.
For founders considering these instruments, working with experienced capital raising lawyers can help ensure the structure supports the company’s future fundraising strategy.
Let’s delve a bit deeper into some of the key features and differences between convertible notes, SAFEs and warrants.
What is a Convertible Note?
A convertible note is typically structured as a debt instrument that may convert into shares later on agreed terms. In essence, convertible notes work by enabling the investor to provide capital upfront, with the note converting into equity upon a specified trigger event, such as a priced round, an exit or maturity.
Convertible notes typically include commercial terms such as a valuation cap, a discount or conversion price, interest, defined conversion and redemption triggers, and a maturity date. These features structure how and when the note converts and can provide early investors with economic protections or incentives.
Convertible notes are a common choice for businesses that need to raise capital quickly, where bridging to a later equity round or deferring valuation is more practical than negotiating full equity terms upfront. In practice, our capital raising lawyers often assist businesses in structuring the commercial terms of convertible notes so that caps, discounts and conversion mechanics align with future funding rounds.
If you want a complete breakdown of common provisions, mechanics and investor protections we often see in convertible notes, check out our term by term guide, which will explore these concepts in more depth. You can also find guidance on the potential tax implications of convertible notes on the ATO’s website.
What is a SAFE (Simple Agreement for Future Equity)?
SAFEs (Simple Agreements for Future Equity) are contractual rights to receive shares in a future funding round. Unlike convertible notes, SAFEs are not debt and generally do not carry interest or a maturity date. Their simplicity makes SAFEs popular in early-stage and accelerator-style funding, where speed and low friction are prioritised over more structured investor protections.
SAFEs commonly include a valuation cap, a discount or both, with conversion typically occurring automatically in a qualifying equity round at a price determined using an agreed formula. Most SAFEs also address what happens outside a standard equity raise, including how the instrument behaves on an exit event (such as a sale of the company) and the circumstances in which the SAFE may terminate.
For a deeper look at how caps, discounts and other SAFE terms operate in practice, check out our article on Understanding SAFEs.
What is a warrant?
A warrant is a right, but not an obligation, to acquire shares at a fixed price (the strike price) within a defined period. Warrants are commonly used in strategic investment deals, venture debt arrangements, advisor agreements and other partnerships where investors or counterparties receive additional upside potential.
Warrants operate differently from convertible notes and SAFEs. They do not typically convert on a financing event; rather, the holder elects whether to exercise the warrant and pay the strike price for the shares, giving warrants a more option-like character.
Warrants may be issued on their own or alongside other instruments. Our upcoming deep dive into warrants explores strike prices, vesting, coverage percentages and exercise mechanics in more detail.
The role these instruments play in the capital stack
Convertible notes, SAFEs and warrants do not replace a priced equity round – they sit alongside it. Understanding where each instrument fits in the broader capital structure is essential to planning dilution, managing investor expectations and maintaining a clean cap table. This is also where experienced capital raising lawyers can add value by helping business model dilution outcomes and structure instruments that remain workable across multiple funding rounds. We explore this in more detail in our upcoming article on How convertible notes, SAFEs and warrants fit into the capital raising stack.
In short, convertible notes, SAFEs and warrants each serve different purposes in helping businesses raise capital efficiently. Understanding the mechanics of each instrument can influence negotiation strategy and long-term dilution.
Our capital raising lawyers regularly assist founders and investors in structuring and negotiating these instruments. If you are considering issuing a convertible note or reviewing terms proposed by an investor, speaking with our experienced capital raising lawyers can help you understand how the provisions interact and how they may affect dilution in future rounds.
