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SAFE notes and convertible notes can materially change the equity split in an Australian funding round, and therefore the valuation outcome for founders, investors, and incoming buyers. From a business valuation perspective, the key issue is not simply how much cash is raised, but how that capital converts, at what discount or valuation cap, and how the conversion mechanics affect diluted ownership, earnings per share equivalent outcomes, and the economic value attributable to ordinary shareholders.

How SAFE notes and convertible notes affect valuation

A SAFE note, or Simple Agreement for Future Equity, and a convertible note both provide early funding today in exchange for future equity later. In practical terms, the investor is betting that the company’s valuation will be higher at the next priced round, while the founder is accepting dilution that will only become fully visible when the security converts. That deferred dilution is where many valuation surprises arise.

For privately held businesses, this matters because transaction comparables, discounted cash flow modelling, and capitalisation rate methods all depend on understanding the true capital structure. If a company has issued SAFEs or convertible notes, the valuer must consider the effective fully diluted ownership base, the conversion price, any discounts, any valuation caps, accrued interest on notes, and whether the instrument has investor protections that alter the economic rights attached to ordinary equity.

In an Australian valuation engagement, these instruments can change the conclusion in a meaningful way. A business that appears to be raising capital at a strong headline valuation may, after conversion, deliver a much lower implied value per ordinary share than founders expect. That is why the business valuation implications must be tested carefully rather than relying on the face value of the round.

Why dilution surprises occur in funded private businesses

The most common surprise is that the conversion event is often not based on the same valuation headline announced in the funding round. A SAFE may convert at the lower of a valuation cap or a discount to the next round price. A convertible note may do the same, plus interest, and sometimes maturity or repayment terms can further influence bargaining power. The result is that early investors may receive more shares than founders assumed when they accepted the initial capital.

For example, a company may raise funds on the basis that the next equity round will be completed at a $20 million pre-money valuation. If a SAFE includes a $12 million cap, then conversion may occur as though the company were valued at $12 million for that investor, before considering any discount. In effect, the investor receives a larger share of the company than the headline round suggests. For valuation purposes, the value allocated to existing shareholders is therefore diluted more heavily than a simple press release implies.

This is especially important when valuing founder-led businesses where the equity story is tied to growth, recurring revenue, or intellectual property. A valuation based on EBITDA multiples, revenue multiples, or a DCF may support one enterprise value, yet the post-conversion ordinary equity value can be materially lower once dilution from SAFEs and notes is reflected.

Key valuation mechanics behind conversion

1. Valuation caps and discounts

The two main pricing features are the valuation cap and the discount rate. The cap creates a maximum company valuation at which the note converts, while the discount gives the investor a percentage reduction to the price paid by new investors in the next round. From a business valuation perspective, both mechanisms effectively transfer value from founders to early backers.

Where both terms apply, the investor usually converts at whichever outcome is more favourable. A 20 per cent discount in a strong round may be less powerful than a low valuation cap in a smaller round, but the valuer must test both scenarios. The conversion price should be modelled under a fully diluted basis, because option pools, employee incentives, and other convertible securities can compound the effect.

2. Interest and maturity on convertible notes

Convertible notes are debt until they convert, so they generally accrue interest and may have a maturity date. That matters for valuation because the note can increase in principal value before conversion, and if conversion does not occur on the expected timetable, repayment risk becomes relevant. In a business valuation engagement, the note must be assessed not only as a financing tool, but also as a claim on enterprise value.

If a business has weak cash flow, high churn, or slowing growth, the note may put pressure on the balance sheet and lower the risk-adjusted equity value. If the company is a SaaS business with strong net revenue retention (NRR) above 110 per cent and low churn, the market may tolerate more dilution because investors place a higher value on future recurring revenue. The underlying valuation logic remains the same, but the performance context changes the market multiple and the probability of conversion.

3. Fully diluted capital structure

A proper valuation requires a fully diluted capitalisation table. This means ordinary shares, options, employee share schemes, SAFEs, convertible notes, warrants, and any other rights that can become equity need to be considered. If not, the value per share can be overstated and the founder’s residual interest can be misread.

In practice, business owners often focus on enterprise value and overlook how that value is divided. For example, a company valued at $15 million before dilution may look strong on paper, but if several million dollars of SAFEs convert at a low cap, the ordinary shareholders may hold a much smaller value than expected. This is not merely a legal or funding issue, it is a valuation issue.

How a valuer analyses these instruments in an Australian business valuation

An Australian valuer will usually begin by identifying the appropriate valuation basis and purpose. For fairness opinions, shareholder disputes, family law matters, tax matters, or capital raising decisions, the scope of the valuation engagement will influence the level of detail required. Under APES 225 Valuation Services, there is an important distinction between a Valuation Engagement, a Limited Scope Valuation Engagement, and a Calculation Engagement. That distinction matters when convertible instruments could materially change the outcome.

The valuer will then analyse the business using accepted methods such as DCF, market multiples, and, where relevant, asset-based approaches. For a profitable services business, EBITDA multiples may sit in a broad range of around 3x to 7x depending on growth, customer concentration, margins, and defensibility. For recurring revenue software businesses, ARR multiples can be significantly higher, sometimes in the high single digits to low teens for stronger cohorts, but only where churn, NRR, and growth quality support that result. The presence of SAFEs and convertible notes does not change the method, but it changes how the final value is allocated.

Discounted cash flow analysis is particularly useful where the company is pre-profit or scaling rapidly. The valuer will assess the weighted average cost of capital, forecast dilution, and model conversion timing. If conversion occurs before exit, the future cash flows available to ordinary equity holders are reduced. If the company is likely to require another round, the probability of further dilution may also be relevant.

In some cases, discounts for lack of marketability or control may also be appropriate, especially where there is no active market for the shares and the holder cannot force a sale or redemption. Those discounts can materially affect the value allocated to minority equity holders after conversion.

Australian market context and regulatory considerations

Australian businesses frequently encounter these instruments in technology, healthcare, professional services, distribution, and other growth sectors where capital is raised before profitability. That said, the valuation consequences are not limited to startups. A mature private company may also issue convertible finance to support expansion, acquisition activity, or temporary liquidity, and the resulting dilution still needs to be reflected in the valuation.

Australian tax and regulatory settings can also affect value and transaction structure. Capital Gains Tax (CGT), the small business CGT concessions, the 15-year exemption, active asset rules, and GST treatment on business sales as a going concern can all influence what a buyer is willing to pay and what a seller ultimately retains. Division 7A on private company loans can also be relevant where funding is informal or intertwined with shareholder advances. A valuation should not be prepared in isolation from these realities.

Another emerging consideration for some owners is Division 296, which commenced on 1 July 2026. It taxes realised earnings only, not unrealised gains, and applies as a personal tax assessed to the individual rather than to the fund. The thresholds of $3 million and $10 million are indexed, and first assessments are issued in the 2027-28 year for the 2026-27 financial year. For SMSFs holding business assets, business real property, or shares in a privately held company, current market valuation is directly relevant, including where an optional cost base reset to market value as at 30 June 2026 is being considered. That is a clear example of why structured valuation work is often required for Australian business owners.

Common mistakes founders and investors make

One of the biggest mistakes is assuming the pre-money or post-money headline from a funding round is the same as the value of ordinary shares after conversion. It is not. The conversion terms can change the economics materially, especially when multiple rounds of SAFEs or notes are stacked over time.

Another common error is ignoring accrued interest, option pool refreshes, or unissued performance rights. These items may seem incidental, but they alter the fully diluted share count and therefore the value per share.

A third mistake is relying on a rule-of-thumb multiple without adjusting for capital structure complexity. A business may trade at a reasonable EBITDA multiple or ARR multiple in isolation, but if there is substantial convertible funding outstanding, the equity value must be reduced accordingly. In a valuation engagement, that means the valuer should reconcile enterprise value to equity value carefully and transparently.

Conclusion

SAFE notes and convertible notes are useful funding tools, but they can create significant dilution surprises if their conversion features are not modelled properly. For Australian business owners, investors, accountancy teams, and advisers, the real issue is how those instruments affect enterprise value, ordinary equity value, and the eventual share of proceeds available to each stakeholder. A sound valuation engagement should test the capital structure, conversion terms, market multiples, and forecast assumptions before any capital raising decision is made or any transaction is agreed.

If you would like a confidential discussion about how SAFEs, convertible notes, or other funding instruments may affect the valuation of your private business, contact InteleK Business Valuations & Advisory for a professional valuation consultation tailored to your circumstances.