SAFE? Con Note? Priced? Which should an angel investor prefer?

I often read advice for startup founders about when and why to choose between seeking investment on the three most common kinds of terms — a SAFE, a convertible note, or a priced equity round. Professional and experienced venture capital investors need no advice in this area, but what if you’re a new angel investor, such as those we have joining the M8 Syndicate on Aussie Angels?

First, let’s be sure we understand how each of these kinds of investment works, and when they’re most appropriate. Each has its own benefits, risks, and strategic considerations.

A priced equity round is the traditional way of investing in a startup. You and the other investors involved agree with the startup on a valuation on the company and, in exchange for your investment, you receive a specific percentage of ownership, and this ownership is represented by shares in the company.

This structure provides clarity — both in terms of your equity stake and your rights as a shareholder. It also usually ensures you have formal protections such as voting rights, pro-rata rights, and information rights. If you’re the lead investor, one of the larger investors in the investment round, or already an essential advisor to the company, it may also include a board seat.

The key advantage of a priced round is that it locks in valuation and ownership — you know exactly what you’re getting. However, priced rounds involve higher transaction costs due to the need for legal and accounting work. They may also take longer to finalise because they often include negotiations around governance rights and investor protections. As an individual angel investor you can usually rely on a ‘lead investor’ to incur most of the time and cost involved, if you feel you can trust their work, but you still have to wait for it to happen, and negotiations may fall through.

Convertible notes offer a more flexible alternative, functioning as a short-term loan that converts into equity at a later date, typically when the startup raises its next funding round. The conversion often happens at a discount to the next round’s price, which rewards early investors for their risk. Notes may carry interest (often around 5–8%), which can also convert into equity, adding to the investor’s eventual ownership. They may also include a “cap” acting as a compulsory conversion of your loan to equity if the startup subsequently raises at or above an agreed valuation.

The main advantage of a convertible note is that it defers the valuation discussion to a later stage, when the company has more data to support a higher valuation. This can provide upside potential if the startup performs well. Convertible notes are also generally faster and cheaper to execute than priced rounds, making them an efficient way for an angel investor to deploy capital.

That said, convertible notes come with risks. If the startup never raises a later funding round that triggers conversion, the note may not convert, leaving you and other investors either unpaid or forced to negotiate a direct equity stake. There’s also the risk of excessive dilution if a startup has raised using multiple rounds of convertible notes, which can impact the your eventual stake if the conversion terms aren’t well structured. Notes usually lack voting rights or governance protections until they convert. Most importantly for Australian investors in Australian companies, is that convertible notes may not qualify for the Early Stage Innovation Company (ESIC) tax concession, which offers great tax savings both on money you invest in a startup and money you pull out if your investment succeeds.

SAFEs (Simple Agreements for Future Equity) were introduced by US tech startup accelerator Y Combinator in 2013, as a streamlined alternative to convertible notes. They function in a similar way to a convertible note, in that they allow an investor to provide capital in exchange for a future equity stake, but without the debt-like characteristics of a note. There’s no interest or maturity date, making SAFEs particularly founder-friendly.

For you as an investor, the key attraction of a SAFE is its simplicity. The documentation is lightweight, reducing the time and cost of legal review and potentially speeding up the investment process. Like convertible notes, SAFEs defer valuation discussions until a future round. They typically include a valuation cap and/or a discount rate, which ensures early investors benefit from a more favourable conversion price compared to later investors.

But SAFEs come with their own risks. Since they don’t have a maturity date, there’s no automatic date trigger for conversion, meaning the investment could remain in limbo if the startup never raises a priced round. Neither do SAFEs offer the potential protections that convertible notes do, such as interest accumulation or the ability to demand repayment. Like convertible notes, SAFEs also may not meet the requirements for the ESIC tax concession, which only applies to investments in newly issued shares.

To collect your upfront tax offset and future CGT-free return, the SAFE you’ve invested in will need to convert to shares before the startup has earned more than AUD$200,000 in revenue and before its big enough to have incurred more than AUD$1M in expenses in the year prior to your shares converting. You’re not in control of any of that timing.

Do I even get to decide what form my investment takes?

Usually, as a humble individual angel investor, you won’t have sufficient leverage to negotiate your preferred terms with a startup unless you’re contributing the largest part of the investment round. But that doesn’t mean you have no leverage at all — you have three alternatives.

Importantly, you have the right to decide not to invest in any startup you want because you’ve decided you don’t like the terms. You never need to surrender that power and you shouldn’t succumb to peer pressure from other angel investors or a persuasive, hard-sell founder. If it doesn’t feel safe enough for you, don’t do it.

Next, foster a good working relationship with larger investors in the ecosystem; those which have the ability to write cheques big enough to negotiate favourable terms. If you can be helpful to them in some way (perhaps through scouting for great deals or applying your own professional skills to mentor their portfolio startups) they may be generous enough to ensure the favourable terms they’ve negotiated for themselves will apply to you too. You won’t get a board seat but you might get observer rights, and you may get pro rata rights to invest in future rounds.

Finally, join angel syndicates, which are a loose alliance of smaller angel investors like you, in which angels all share skills, experience and time across deals together. Your combined cheque size and reputation in the industry may, over time, get you the leverage the bigger investors enjoy.

So, how should an angel investor decide which structure to use? It depends on a few factors:

• Stage of the startup: If the company is still unproven, a SAFE or convertible note might provide a way to get in early without locking in a valuation too soon. If it has strong traction, a priced round can provide you a clearer path to exit and governance rights.
• Risk tolerance: If you want forma l protections and defined ownership you may prefer priced rounds or convertible notes with strict terms. If you’re ready to trade a little more risk for a little more potential future upside, you might be comfortable with SAFEs, knowing you may have to wait longer for conversion.
• Speed and cost: If speed is critical, SAFEs and convertible notes are faster and cheaper than priced rounds, allowing investors to deploy capital quickly.
• Future fundraising: If a startup is likely to raise a significant VC round soon, a SAFE or convertible note may work well. If the fundraising path is uncertain, a priced round ensures that your stake is locked in.
• Tax: If qualifying for the ESIC tax concession is a priority, be aware that only direct equity investments typically meet the eligibility criteria, whereas convertible notes and SAFEs may not if they don’t convert early enough.

What about being“founder friendly”?

Generally speaking, when you hear about one form of investment agreement being “founder friendly”, you should think: “less investor friendly” — the time and cost saved by startup founders using SAFEs and convertible notes mostly would have gone into clarifying how much of the company you own and when, your right to participate in future rounds, shareholder voting rights, etc.

But the ultimately, no structure is inherently superior — it’s about matching the investment mechanism to your investment strategy, interests, and risk appetite.