7 min read

How to Raise Capital Without Giving Away Too Much Equity

7 min read

SAFE notes, convertible notes & revenue-share agreements for Aussie and US founders

Why dilution matters
Three founder-friendly instruments at a glance
SAFE notes — the “simple” alternative to priced rounds
Convertible notes — debt that wants to become equity
Revenue-share agreements — non-dilutive, cash-flow-based capital
AU vs US: legal, tax and investor expectations
Choosing the right tool for your stage
Negotiation tips & red flags
Founder checklist
Key take-aways & next steps

1. Why dilution matters

Every dollar you raise today at a low valuation can cost you millions tomorrow. Equity you give away is gone forever; it compounds across each subsequent round. Preserving ownership is not only an ego issue—it keeps voting control, exit flexibility and a bigger share of dividends.

Yet bootstrapping forever is rarely realistic. The game is to access outside capital without handing over more equity than necessary. Three instruments dominate that sweet spot:

SAFE notes
Convertible notes
Revenue-share (a.k.a. revenue-based financing)

Each shifts part of the risk onto investors without a formal valuation today, letting you grow, hit milestones, and price equity later—on your terms.

2. Three founder-friendly instruments at a glance

Instrument	Dilution Timing	Typical Ticket	Works in AU?	Works in US?	Key Risk
SAFE note	Converts at next equity round	A$50k–A$2 m	✔* (see local tweaks)	✔	Future dilution may be higher than you expect
Convertible note	Debt converts or repaid	A$100k–A$5 m	✔	✔	Interest + maturity clock
Revenue-share agreement	No equity; % of revenue until multiple repaid	A$25k–A$3 m	✔	✔	Cash-flow pressure if sales dip

* Australian SAFEs are typically drafted under local Corporations Act provisions rather than the US YC template. sprintlaw.com.au alliedlegal.com.au

3. SAFE notes — the “simple” agreement for future equity

3.1 What a SAFE is

Invented by Y Combinator in 2013, a SAFE is neither debt nor equity today. The investor hands over cash now and receives the right to convert into shares at your next “priced” round, usually at a discount or subject to a valuation cap. There’s no interest, no maturity date, and (critically) no immediate dilution. ycombinator.com

3.2 Key terms you must understand

Term	What it means	Founder watch-outs
Valuation cap	The maximum company valuation used to price the investor’s shares.	A low cap effectively locks in a cheap future equity price.
Discount rate	% reduction on the next round price (e.g. 20 %).	Stacks on top of the cap if both apply.
Pre- vs post-money	Post-money caps include the SAFE itself in the cap, increasing dilution.	Y Combinator switched to post-money in 2018. pillarlegalpc.com
Most-Favoured Nation (MFN)	Lets the investor adopt better terms you give a later SAFE investor.	Can complicate future closes.

3.3 Using SAFEs in Australia

Australian law doesn’t specifically recognise the US SAFE. Lawyers adapt the template or use “simple convertible security” deeds.
You still need to stay under the 20 retail investor / A$2 m cap under s708 of the Corporations Act unless you lodge a prospectus.
Tax: No CGT event until conversion; no interest deductions for investors (because no debt). sprintlaw.com.au

3.4 Example — Gold Coast SaaS pre-seed SAFE

Scenario	Details
Raise	A$500k SAFE, post-money cap A$5 m, no discount
Next priced round	Series A at A$20 m post
Conversion	SAFE converts into 10 % of the company (A$500k / A$5 m). Founder owns 90 % going into Series A, vs 97.5 % if no SAFE.

3.5 Example — Delaware C-Corp SAFE

Scenario	Details
Raise	US$1 m SAFE, post-money cap US$10 m, 20 % discount
Next round	US$25 m post
Conversion	SAFE investor gets the better of cap or discount. Cap wins: US$10 m price → 10 % of the company.

4. Convertible notes — debt that wants to be equity

4.1 Anatomy of a convertible note

Convertible notes pre-date SAFEs. They’re short-term debt that automatically converts to equity on a triggering event (usually the next round), or must be repaid (with interest) at maturity. Because they are debt, they:

Accrue interest (2-8 % p.a. is common in 2025).
Have a maturity date (12–36 months).
Sit senior to equity if things go pear-shaped.

4.2 Why founders still use notes

Some investors (especially funds with debt mandates) can’t buy SAFEs.
Interest + maturity acts as a forcing function to close the next round.
Jurisdictions comfortable with debt treat notes as familiar.

4.3 Australian twists

The ATO treats accrued interest as ordinary income for investors. community.ato.gov.au
If the note converts, the ATO may treat the event as CGT scrip-for-scrip rollover.
Sections 254A and 259A of the Corporations Act govern redeemable preference shares and can influence note structuring—legal advice is mandatory.

4.4 Example — Melbourne MedTech seed note

Term	Example
Principal	A$750k
Interest	6 % simple p.a.
Valuation cap	A$12 m
Discount	20 %
Maturity	24 months
Scenario	If Series A closes at A$20 m after 18 months, investor converts under the A$12 m cap and receives 6.25 % of the company.

4.5 US example — Silicon Valley pre-A

Term	Example
Principal	US$2 m
Interest	5 % compounding
Cap	US$15 m
Discount	None
Maturity	18 months
Outcome	Series A at US$30 m → investor converts under cap at 6.67 % ownership. If no Series A by maturity, founders must negotiate extension or repay US$2.15 m.

5. Revenue-share agreements — fund growth, not dilution

Revenue-based financing (RBF) let founders borrow capital and repay as a fixed % of future revenue until a pre-agreed multiple (often 1.3-1.8×) is hit. Once repaid, obligations cease; no equity ever issues.

5.1 Mechanics

Advance: Capital hits your account upfront.
Revenue share: Pay e.g. 5 – 10 % of monthly gross revenue until repayment cap.
Term: Flexible—if revenue grows, you repay faster; if it slumps, payments fall.
Security: Usually unsecured; lender may require business debenture in AU.

5.2 Advantages

Zero dilution.
Payments scale with revenue, preserving runway during slow months.
Can stack alongside equity or debt.

5.3 Downsides

Effective APR can be steep if you grow fast and repay early.
Restrictive covenants (minimum reporting, change-of-control triggers).
Not suitable for deep-tech with long pre-revenue phases.

5.4 Australian scene

RBF became “mainstream” for SaaS and e-commerce in 2024-25, with local players such as Tractor Ventures and Clearco’s AU arm. gilion.com

5.5 Example — Brisbane e-commerce

Deal	Details
Advance	A$250k
Share	6 % of monthly revenue
Cap	1.5× (total repay A$375k)
Outcome	At A$100k monthly revenue, repayments are A$6k; total pay-off in ~38 months if revenue flat, faster if it scales.

5.6 US example — Utah SaaS

Deal	Details
Advance	US$1 m from Capchase
Share	8 % revenue
Cap	1.35×
Result	Company triples ARR in a year, repays in 14 months; IRR to lender ≈ 29 %. Founder keeps 100 % equity.

6. AU vs US: legal, tax & investor expectations

Issue	Australia	United States
Regulatory exemption	s708 (20 investors ≤ A$2 m) or CSF platform	Reg D 506(b)/(c), Reg CF, or intrastate
Securities type	Convertible securities deed; note deed; debenture under Corporations Act	Delaware law convertible note; SAFE under California or Delaware law
Tax on conversion	CGT event (but rollover may apply)	No tax until liquidity; 83(b) rarely triggered
Interest deductibility	Investor income, company deductible	Same
RBF enforcement	Corporations Act + PPSA charges	UCC Article 9 security interest

Investor sentiment:

AU angels increasingly comfortable with SAFEs but often add side letters (eg, board observer).
US VCs expect YC post-money SAFE or bespoke note at seed, priced rounds at Series A.
RBF in AU often supplementary to equity; in the US can form primary capital stack for bootstrappers.

7. Choosing the right tool for your stage

Stage	Cash burn profile	Best fit
Idea / prototype	Pre-revenue, high uncertainty	SAFE – fastest to close, minimal legal cost
Early revenue (<A$1 m ARR)	Moderate burn, hitting PMF	Convertible note if investors insist on debt-like downside; or SAFE if momentum strong
Scaling (A$1-10 m ARR)	Predictable cash flows	Revenue-share to fund marketing/inventory without dilution
Bridge to Series A	Clear milestones, short runway	Short-maturity note or SAFE with MFN

Hybrid stacks are common: e.g. A$500k SAFE + A$200k RBF to extend runway and avoid a down round.

8. Negotiation tips & red flags

Model post-money ownership for every SAFE/Note you issue. Tools like Carta or simple spreadsheets avert nasty surprises.
Cap stack order matters: a SAFE with a low cap issued after a note with a high cap can squeeze both founders and earlier investors.
Maturity traps: Notes that hit maturity without conversion give investors leverage—add “automatic conversion at a 1× liquidation preference” if no qualifying round.
RBF percentage creep: Multiple providers stacking revenue shares can push combined take above 15 %, throttling growth.
Legal localisation: Don’t copy-paste a US SAFE into an Australian Pty Ltd without revisions; auditor qualification risk is real. alliedlegal.com.au
Board/observer creep: SAFEs don’t automatically grant governance rights—investors may ask anyway. Trade sparingly.

9. Founder checklist

✅ Map 24-month cash needs & milestone valuation inflection.
✅ Decide acceptable dilution per milestone (e.g. ≤10 % pre-Series A).
✅ Pick instrument(s) aligned with cash-flow timing.
✅ Draft AU-compliant (or Delaware-compliant) docs—don’t rely on templates alone.
✅ Model conversion scenarios: cap-table after each raise at low, medium, high valuations.
✅ Engage tax advisors on CGT, interest deductibility and withholding.
✅ Secure board approval / shareholder resolutions where required.
✅ Register security interests (PPSR in AU, UCC-1 in US) for notes or RBF where relevant.
✅ Communicate transparently with existing investors about stacking effects.

10. Key take-aways & next steps

SAFE notes are fastest and cheapest but can secretly be the most dilutive if you underestimate future valuation.
Convertible notes add a ticking clock and interest—great if you’re confident of a priced round within 12-18 months.
Revenue-share agreements keep your cap-table pristine but suit businesses with predictable, gross-margin-rich revenue.
Australian founders must navigate Corporations Act limits and tax quirks; US founders juggle SEC exemptions—but both ecosystems now support all three instruments.

Ready to structure a founder-friendly raise?

Digital One Agency has helped dozens of AU & US startups close early capital while preserving ownership. Book a confidential chat and we’ll walk through cap-table modelling, instrument selection and investor outreach.

Email: contact@digitaloneagency.com.au
Call us 24/7 globally: tel:+61290579079

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