Two investors can put the same amount of money into the same company and walk away with very different outcomes. The difference is the instrument they hold.
Ordinary shares, preference shares, convertible notes, SAFEs, options and warrants each allocate ownership, control, risk and upside in a different way. Understanding those differences is essential whether you are raising capital, investing in a private company, or negotiating a sale.
Our free guide, Equity Instruments: An Investor’s Guide, explains how each instrument works, with worked examples showing what happens to the numbers in practice.
Why the instrument matters as much as the investment
Consider a company sold for $30 million. If creditors are owed $15 million and preference shareholders hold a $10 million liquidation preference, ordinary shareholders share only $5 million. Same company, same sale price, very different results depending on where you sit in the capital structure.
This is why sophisticated investors look beyond the headline valuation. The rights attached to each instrument, including liquidation preferences, conversion terms, valuation caps and vesting conditions, determine what an investment is actually worth.
The instruments at a glance
Ordinary shares
The core form of ownership. Ordinary shareholders typically hold voting rights and full participation in upside, but rank last in a liquidation. Known as common stock in US term sheets.
Preference shares
Preference shareholders rank ahead of ordinary shareholders for dividends and liquidation proceeds, usually in exchange for limited voting rights. Often used in growth-stage funding rounds, and known as preferred stock in US term sheets.
Convertible notes
A loan that accrues interest and converts into equity at a future funding round, usually at a discount or subject to a valuation cap. If no conversion occurs before maturity, the note may become repayable.
SAFE notes
A Simple Agreement for Future Equity gives investors the right to equity at a later priced round. Unlike a convertible note, a SAFE is not debt: there is no interest and no maturity date.
Options
The right, but not the obligation, to buy shares at a set exercise price. Commonly used to attract and retain employees, executives and advisers, usually subject to vesting.
Warrants
Similar to options, but typically issued to investors or lenders as part of a financing transaction to make the deal more attractive.
Units and fund equity
Proportional ownership in a pooled vehicle such as a fund, trust or ETF, rather than a direct stake in a single operating company.
SAFE vs convertible note: the common early-stage question
Both instruments defer valuation until a later funding round, which makes them useful when a company is still difficult to price. The difference lies in the terms.
| Feature | Convertible note | SAFE |
|---|---|---|
| Legal nature | Debt instrument | Not debt |
| Interest | Accrues interest | No interest |
| Maturity date | Yes | No |
| Investor protection | Generally stronger | Generally weaker |
| Best suited to | Bridge or interim funding | Simple, fast early-stage raises |
The guide includes a full worked example showing how a $500,000 convertible note with an 8% interest rate, 20% discount and $5 million valuation cap converts at a Series A round, and why the cap produces the better outcome for the noteholder.
What’s inside the guide
- Equity versus debt instruments, compared side by side
- Key terms, advantages and disadvantages for each instrument
- Worked examples for ordinary shares, Series A preference shares, convertible notes, options and warrants
- SAFE vs convertible notes and options vs warrants comparisons
- A one-page summary of when each instrument is used
Where valuation comes in
Equity instruments and valuation are closely linked. A capital raise requires a defensible pre-money valuation. Preference shares and liquidation preferences change how value flows to each class of shareholder. Employee option plans often require a market value for the underlying shares. Convertible instruments ultimately convert at a price that someone has to justify.
Many firms offer valuations without a licence, but ASIC classifies equity valuation as a financial service under the Corporations Act. Sherwood Australia holds AFSL 563351, and our valuations are prepared to be accepted by investors, acquirers and regulators.
Let’s talk about your valuation
Whether you are preparing for a capital raise, a licensing deal, a shareholder transaction or a cross-border negotiation, Sherwood can help you understand, articulate and defend your value.
Book a confidential valuation strategy session
This article and the accompanying guide provide general information only and do not take into account your objectives, financial situation or needs. Consider seeking advice specific to your circumstances before acting. Sherwood Australia holds Australian Financial Services Licence 563351.