Short answer: for most Australian startups, a SAFE shows up as debt on your balance sheet, not equity.

A SAFE feels like equity. You took the money to hand over future shares, there is no interest and no repayment date, and everyone treats it as part of the cap table. But how it feels and how your accounts have to treat it are two different things, and the accounting rules land on debt far more often than not.

Here is why, in a nutshell.

Australia has enthusiastically adopted the Y Combinator style post-money SAFE, where the money converts into shares at your next priced round using a valuation cap and, or, a discount. That one design choice decides the accounting. Because conversion happens at a future round price, the number of shares the investor eventually gets is not fixed when you sign. It depends on a later event.

The accounting rules have a simple test for this. A contract you settle in your own shares only counts as equity if it converts into a fixed number of shares for a fixed amount. If the number of shares can move, it is treated as debt instead. A cap and a discount are exactly what make the share count move. So the very features that make a SAFE appealing to investors are also what push it onto the debt side of your balance sheet.

What that means for you

Until the SAFE converts, it sits as a liability, above the equity line. That can leave you showing negative net assets even straight after a solid raise. Nothing has gone wrong, but a board member, investor or lender glancing at the balance sheet may need the context. The SAFE only moves into equity when it actually becomes shares, at your priced round.

One upside worth knowing. A low, or even negative, net tangible assets position is actually an attractive place to be when you are using the net tangible assets method to set the exercise price for your employee share scheme. That method takes your net tangible assets and divides them across your shares to reach a value per share, so a lower net tangible assets figure means a lower exercise price, and more upside for your team. If you are running an ESOP alongside your SAFEs, the timing can work in your favour. See our article on setting an ESOP valuation.

Can a SAFE be equity instead?

Yes, but it has to be built for it. You would need a version with no cash-back triggers and a genuinely fixed conversion, no cap and no discount moving the share count. That is not the market-standard SAFE, so equity treatment is the exception, not the rule.

It is worth knowing that convertible notes are not automatically different. Founders often assume a note is more equity-friendly. A plain note that converts into a fixed number of shares does get partly treated as equity. But add a cap or a discount, which is normal, and the conversion becomes variable again and it goes back to being debt. The question is always whether the conversion is fixed, not whether you call it a SAFE or a note.

One last source of confusion

Under United States accounting rules, SAFEs are handled differently, and plenty of US tools and founders casually describe them as equity. That framing travels here, where it often does not hold. If you report under Australian standards, the debt answer above is the one that applies to you.

References

The classification rules sit in AASB 132 Financial Instruments: Presentation, the Australian equivalent of the international standard IAS 32. The key concepts are the equity test (a fixed number of shares for a fixed amount) and the treatment of contracts that can be settled in cash on certain events. AASB 132 (compiled standard).

Disclaimer: This article is for general informational purposes only and does not constitute financial, legal or tax advice. Please speak with a qualified adviser (hey, that’s us!) before making decisions based on your specific circumstances.