Seed Funding for Australian Startups: What to Know Before You Raise

The seed round is often the first major legal decision a startup founder makes. The instrument you choose and the terms attached to it will follow you through your cap table, your Series A, and every investor conversation in between. This guide explains how seed financing works in Australia, the instruments available, and what each one means for founders in practice.

What is seed financing?

The seed round is the first outside capital a startup raises. It typically follows a period where founders have been funding development themselves (sometimes called bootstrapping) or drawing on informal support from friends and family.

Seed investors are filling a gap: the company is not yet at a stage where institutional venture capital will invest, but it needs capital to get there. A seed round might fund a first hire, a beta build, or simply allow founders to stop working two jobs and focus on the startup full time.

In Australia, a typical seed round raises somewhere between $500,000 and $2 million, with individual investors contributing anywhere from $10,000 to $100,000. Rounds above $2 million are generally considered Series A territory, though the labels matter less than the substance of the deal.

Who invests at seed stage?

Seed investors tend to come from three groups, and understanding the difference matters because it affects which instrument you use and how you structure the conversation.

Friends and family are often the first port of call. These investors are backing the person as much as the idea. They typically have limited investment experience and are not positioned to negotiate complex terms.

Angel investors are high-net-worth individuals who invest part of their wealth in early-stage companies, often across a portfolio. Many angels operate through networks where they share deal flow and co-invest with others. When you can interest one angel, that person will often bring contacts from their network along.

Super angels are full-time early-stage investors who operate their own funds and can be as sophisticated as institutional VC. They tend to invest in more companies at smaller amounts and typically do not take board seats, but they are comfortable with the full suite of seed financing terms.

Accelerators also participate. They offer mentoring, industry access, and sometimes seed capital in exchange for equity, typically through a competitive selection process.

Disclosure obligations under the Corporations Act

Before discussing instruments, founders need to understand the legal baseline.

Under Chapter 6D of the Corporations Act 2001 (Cth), any offer to issue securities generally requires disclosure. Proprietary companies face a further restriction: they can only offer shares to existing shareholders and employees without triggering broader disclosure obligations under section 113.

The exemptions founders typically rely on are in section 708. Offers can proceed without full disclosure where investors qualify as sophisticated investors or professional investors, where they are people associated with the company (such as senior managers or their immediate family), or where the offer qualifies as a small-scale offering. When counting investors under the small-scale offering exemption, sophisticated and professional investors and people associated with the company are excluded from the count.

Because most seed rounds rely on these exemptions, startups typically do not need to prepare a prospectus. They will generally provide a one-page executive summary, a pitch deck, and a term sheet. That does not mean compliance is straightforward. Founders need to confirm which exemptions apply to their specific round and investor mix before they start approaching anyone.

The four seed financing instruments

Australian startups typically use one of four instruments to structure a seed round. Each has different legal, economic, and practical characteristics.

Convertible notes

A convertible note is a debt instrument. The investor lends money to the company, which accrues interest at a fixed annual rate and is repayable at a maturity date, typically one to two years from issue. The distinguishing feature is that the note is designed to convert into equity rather than be repaid in cash.

Conversion usually happens at the company's next equity financing round (the qualifying financing). The note documents themselves consist of three instruments: a note subscription agreement setting out the subscription terms and any warranties, a convertible note deed poll setting out the terms of the notes themselves, and convertible note certificates issued to each investor. The deed poll structure matters because the note terms bind whoever holds the notes from time to time, meaning any amendment to those terms requires a deed.

When conversion occurs, the noteholder receives shares at a price that reflects a discount to what new investors pay, rewarding them for taking on more risk earlier. Most notes also include a valuation cap, which sets a ceiling on the valuation at which the note converts. When both a discount and a cap apply, the noteholder converts at whichever gives them the better outcome.

Convertible notes are well understood by most seed investors. The documents are relatively short and do not require amendments to the company's constitution. They also defer the valuation conversation to a later stage when there is more data to negotiate from, which many founders find attractive.

The main risk for founders is the maturity date. If the company reaches maturity without completing a qualifying financing, investors can use that pressure to extract better terms in exchange for an extension. The company usually does not have cash to repay the note, so its options are limited. Having an amendment provision that gives power to a majority of noteholders rather than requiring unanimity makes an extension less likely to be blocked by a small number of investors.

SAFEs (Simple Agreements for Future Equity)

The SAFE was developed by Y Combinator as a direct response to the maturity problem in convertible notes. It has the same economic structure as a convertible note: conversion at a discount, often with a valuation cap, but without the debt mechanics.

A SAFE has no maturity date and does not accrue interest. It remains outstanding until a conversion event occurs, which is typically a qualifying financing or a sale of the company. SAFE documents are even shorter than convertible note documents, with fewer negotiated terms: typically only the discount rate and valuation cap.

From a founder's perspective, the SAFE eliminates the maturity pressure. From an investor's perspective, the lack of a maturity date removes a mechanism that previously gave investors some ability to force the company's hand if performance stalled.

SAFEs are increasing in popularity, particularly where founders have more negotiating leverage. They may also have advantages under the Venture Capital Act 2002 (Cth) and the Income Tax Assessment Act 1997 (Cth). SAFEs structured as convertible securities that are not debt interests may qualify as eligible venture capital investments, with associated tax benefits for investors.

On insolvency, because a SAFE is not debt, an investor's claim for repayment of their investment sits alongside other unsecured creditors rather than ahead of equity holders. Ipso facto provisions in SAFEs executed after 1 July 2018 are likely subject to the stay on enforcement under the Corporations Act, meaning that in a voluntary administration, receivership, or scheme of arrangement, those provisions may not be self-executing. If the company proceeds directly to liquidation, the investor's claim becomes an unsecured debt ranking alongside other unsecured debts.

Convertible preference shares (Series Seed)

Preference shares are the primary investment instrument in later-stage VC rounds, and some sophisticated seed investors prefer them because the price and terms are locked in at the time of investment rather than deferred to a future round.

Series Seed preference shares typically carry rights and privileges that ordinary shareholders do not have, including a preference in liquidation over ordinary shareholders. They usually include the right for the investor to convert into ordinary shares at their option. Rights attaching to preference shares must be approved by special resolution of the company or incorporated in the company's constitution under section 254A(2) of the Corporations Act, which adds a step to the process and some additional cost.

The advantage for founders is clarity: everyone knows exactly how much of the company they own immediately after the round closes. This avoids the dilution surprise that often comes when convertible notes and SAFEs convert at Series A. Preference share documentation also tends to form the basis for subsequent equity rounds, which can simplify those later financings.

The disadvantage is cost and complexity. Preference share documents are longer, require more negotiation, and often involve warranties and disclosure schedules not found in note or SAFE financings. Preference shares are generally used for larger seed rounds with a sophisticated lead investor. They become less practical for smaller rounds with multiple less experienced investors.

Ordinary shares

Ordinary shares are the simplest instrument. Investors receive the same class of shares the founders hold, with voting rights but no special preferences. The documents can often be adapted from the founder share purchase agreement used at incorporation, keeping legal costs low.

Some founders and early investors like the alignment this creates. Everyone holds the same security and is treated the same. The problem is that most sophisticated investors will not accept ordinary shares because they receive no liquidation preference and no downside protections that preference share holders in later rounds will receive.

Structuring a seed round with ordinary shares also has the most adverse effect on the fair market value of the company's ordinary shares for employee equity incentive purposes. It can be partially addressed by layering contractual protections on top, but once you do that, most of the cost savings that made ordinary shares attractive in the first place disappear.

For these reasons, ordinary shares are the least common seed instrument and, for startups with employees on equity incentives, generally the least recommended.

The unintended outcomes problem

Convertible notes and SAFEs look simpler than preference shares on paper, and they are. But simple documents do not always produce simple outcomes.

A common assumption among founders is that a note or SAFE with a $5 million valuation cap is broadly equivalent to selling equity at a $5 million pre-money valuation. In practice, the two structures can produce very different results for everyone at the cap table, and founders are usually the ones who come off worse.

The core issue is liquidation preference. In a standard preference share round, investors receive a 1x liquidation preference, meaning they get their money back before ordinary shareholders see anything in a sale. That is considered market. But depending on the valuation at which a convertible note or SAFE converts, and the method used to calculate that conversion, noteholders and SAFE holders can end up with an effective liquidation preference that is a multiple of what they invested. The same logic applies to anti-dilution protection: the economics baked into a note or SAFE conversion can be more aggressive than anything that would be accepted as reasonable in a preference share negotiation for the same company.

This is not a drafting error. It is a structural feature of how these instruments work that most founders do not model out before signing.

It tends to surface at Series A. The incoming VC runs the numbers on how the seed instruments convert, finds that the seed investors are receiving more than the parties likely intended, and uses that as a reason to push for concessions from the seed investors, the founders, or both before proceeding.

How to choose the right instrument

The right instrument depends on several factors operating together, and there is no universal answer.

Investor sophistication is usually the starting point. Friends and family rarely have the experience to engage with preference share terms. Convertible notes and SAFEs are easier to explain and close without the investors needing their own legal advisers, which also keeps transaction costs down on both sides.

The amount you are raising matters because more complex instruments cost more to document. A $2 million round led by a super angel can absorb preference share documentation costs in a way that a $300,000 friends and family raise cannot.

Speed is a genuine constraint at seed stage. Momentum with investors is often short-lived, and the simpler the instrument, the faster you can close. Convertible notes and SAFEs close faster than preference share rounds.

Your lead investor's preference often drives the decision in practice. If a sophisticated investor is putting in the largest share and is comfortable with a particular instrument, the rest of the round typically follows that lead.

Market conditions also play a role. In more competitive fundraising markets, founders tend to have more leverage to use simpler instruments on founder-friendly terms. In tighter markets, investors have more leverage to push for preference shares or better conversion economics.

What comes next

The seed round is rarely the end of the legal work. Once you have closed, you need to manage your cap table carefully, understand your obligations to shareholders, and prepare the ground for Series A. The instruments you chose at seed will directly affect the complexity of that next round, including how notes and SAFEs convert, what preferences they carry into the preference share stack, and how they interact with new investor terms.

The decisions that look minor at seed stage have a habit of becoming significant at the point where larger amounts of capital and more sophisticated investors are involved. Getting the structure right early and understanding what you have agreed to is worth the time before you sign anything.