I still remember the first time a SAFE deal blew up in my face. It was 2018, and I was on the other side of the table, a founder raising a seed round for my second company. We were hot, the metrics were climbing, and we had multiple investors interested. One of the first to commit was an angel who I really respected. He suggested a SAFE, and I jumped at it. “Simple Agreement for Future Equity.” What could go wrong? It was fast, cheap, and we didn’t have to set a valuation. It felt like a win.
Fast forward a year. We’re raising our Series A, and the lead investor is doing their due diligence. They’re looking at our cap table, and they’re… confused. The SAFE I’d signed had a high discount and no valuation cap. The angel who’d seemed so supportive was now getting a massive chunk of the company for a fraction of what the new investors were paying. The deal almost fell apart. We had to renegotiate with the angel, which was an awkward, painful process. It cost us time, money, and a lot of stress. That’s when I realized that SAFEs aren’t so simple after all.
Since then, I’ve been on both sides of the table countless times, as a founder and as an investor in over 200 companies, including some you might have heard of like Anthropic and Scale AI. I’ve seen SAFEs work beautifully, and I’ve seen them create absolute chaos. The problem isn’t the document itself. It’s how people use it. Too many founders and investors are still treating SAFEs like it’s 2014, when they were a revolutionary new idea. But the landscape has changed, and it’s time our approach to SAFEs changed with it. In this post, I’m going to share the hard truths I’ve learned about SAFEs and the new rules I follow to make sure they’re actually safe for everyone involved.
The “Simple” Agreement’s Hidden Complexities
The original promise of the SAFE was seductive. In the old days, raising seed funding meant weeks of negotiating a priced round, with lawyers billing by the hour. It was a slow, expensive dance. Then Y Combinator came along and offered a five-page document that you could sign in a day. No valuation, no lawyers, no fuss. It was a game-changer, and it’s a big part of why we’ve seen such an explosion of startup activity over the last decade.
But that simplicity is a double-edged sword. It’s made it too easy for founders to sign documents they don’t fully understand, and for investors to push for terms that can be incredibly damaging down the road. I’ve seen it happen over and over again. A founder, desperate for cash, signs a SAFE with a 30% discount and no valuation cap. They think they’re getting a great deal, but they’re actually giving away a huge chunk of their company at a massive discount. When it comes time to raise a Series A, they’re shocked to find out how much dilution they’ve already taken on. It’s a classic story, and it’s one that I’m tired of seeing.
The truth is, a SAFE is a complex financial instrument, and it needs to be treated with respect. There are a number of pitfalls that can trip up even experienced founders. The DLA Piper article I read recently summed it up perfectly, calling out the “ugly” side of SAFEs: steep discounts, a web of side letters, and a complete misunderstanding of how they impact the cap table. And as the folks at Thunder VC point out, the risks for founders are very real: dilution, a loss of control, and a huge amount of uncertainty about the future valuation of their company.
My New Rules for SAFE Agreements
After years of seeing these problems firsthand, I’ve developed a set of rules that I now follow for every SAFE I sign, whether I’m the founder or the investor. These rules are designed to protect both sides and to make sure that the SAFE is a tool for growth, not a trap.
Rule 1: No More Handshake Deals
This might sound obvious, but you’d be surprised how many deals still happen on a handshake and a vague promise. I get it. You’re moving fast, you trust the person you’re dealing with, and you don’t want to get bogged down in legal details. But a SAFE is a legal document, and it needs to be treated like one. That means everything needs to be in writing. No exceptions.
I once invested in a company where the founder had a “gentleman’s agreement” with another investor about the terms of their SAFE. When it came time to convert, they had completely different recollections of the conversation. It turned into a nasty dispute that almost sank the company. I learned my lesson. Now, I insist on having a clear, written agreement for every single investment. It doesn’t have to be a 100-page legal document, but it does need to spell out all the key terms: the investment amount, the discount, the valuation cap, and any other relevant details.
Rule 2: The 20% Discount Cap
This is a big one. The discount is the percentage off the Series A price that the SAFE investor gets for coming in early. It’s a way of rewarding them for taking on more risk. But I’ve seen founders offer discounts as high as 40% or even 50%. That’s insane. You’re giving away half your company before you’ve even gotten started.
My rule is simple: I never offer or accept a discount of more than 20%. Anything higher than that is a red flag. It tells me that the founder is either desperate or doesn’t understand the math. A 20% discount is a fair reward for the risk an early investor is taking, but it’s not so high that it will cripple the company’s cap table. It’s a good, clean number that everyone can agree on.
Rule 3: Side Letters are a Red Flag
Side letters are separate agreements that are attached to a SAFE. They’re often used to add extra terms that aren’t in the standard SAFE document, like pro-rata rights or information rights. In theory, they’re a way to customize the SAFE to fit a specific deal. In practice, they’re often a sign of trouble.
I once saw a deal with five different side letters, each with slightly different terms. It was a complete mess. No one knew who had what rights, and it took weeks of legal wrangling to sort it all out. That’s why I have a strict “no side letters” policy. If you can’t fit the terms into the main SAFE document, then you’re probably overcomplicating things. A SAFE should be simple. If you need a bunch of side letters to make it work, you should probably be using a different investment vehicle.
Rule 4: Model the Dilution
This is where founders really get into trouble. They sign a SAFE without understanding how it will affect their ownership stake down the road. They see the cash in the bank, but they don’t see the dilution that’s coming. Then, when they go to raise their Series A, they’re shocked to find out that they only own 50% of their own company.
Before you sign any SAFE, you need to model the dilution. That means creating a pro-forma cap table that shows how your ownership will change after the SAFE converts. It’s not as complicated as it sounds. You can find plenty of templates online, or you can ask your lawyer to help you. The important thing is that you understand the math. You need to know exactly how much of your company you’re giving away, and you need to be comfortable with that number.
Rule 5: Set a Valuation Cap
A valuation cap is the maximum valuation at which a SAFE can convert into equity. It’s a way of protecting early investors from being diluted into oblivion if the company takes off. If you raise your Series A at a $100 million valuation, your SAFE investors won’t convert at that price. They’ll convert at the valuation cap, which might be $10 million or $20 million. This means they’ll get a much larger stake in the company, which is their reward for coming in early.
I’m a big believer in valuation caps. I think they’re essential for aligning the interests of founders and investors. But I’ve seen a lot of founders who are reluctant to set a cap. They’re worried that it will limit their upside. That’s the wrong way to think about it. A valuation cap is not about limiting your upside. It’s about making sure that your early investors are fairly compensated for the risk they’re taking. It’s a sign of good faith, and it will make it much easier to raise money from good investors.
Rule 6: Don’t Forget the Pro-Rata Rights
Pro-rata rights give an investor the right to maintain their ownership percentage in future funding rounds. If they own 10% of the company after the seed round, they have the right to buy 10% of the Series A round. This is a crucial right for early investors, and it’s one that I always insist on.
I’ve seen too many founders who try to wash out their early investors in later rounds. They’ll raise a huge Series A and they won’t give their seed investors a chance to participate. It’s a shady move, and it’s a good way to get a bad reputation. If you want to build a great company, you need to treat your investors with respect. That means giving them pro-rata rights and letting them share in your success.
When to Walk Away from a SAFE
SAFEs can be a great tool, but they’re not right for every situation. There are times when you should just walk away. Here are a few red flags to watch out for:
- The investor is pushing for a high discount or no valuation cap. This is a sign that they’re more interested in getting a great deal than in helping you build a great company.
- The investor wants a bunch of side letters. This is a sign that they’re trying to overcomplicate things. A SAFE should be simple. If it’s not, you should be asking why.
- The investor doesn’t understand how SAFEs work. This is a huge red flag. If your investor doesn’t understand the basics of a SAFE, you’re in for a world of trouble down the road.
- You don’t feel comfortable with the terms. At the end of the day, you have to trust your gut. If something feels off, it probably is. Don’t be afraid to walk away from a deal that doesn’t feel right.
In some cases, a convertible note or a priced round might be a better option. A convertible note is similar to a SAFE, but it’s a debt instrument, not an equity instrument. It has a maturity date and an interest rate, which can provide more protection for investors. A priced round is a more traditional way of raising money, where you set a valuation for the company and sell a certain number of shares at a certain price. It’s more expensive and time-consuming than a SAFE, but it can provide more clarity and certainty for both founders and investors.
Conclusion
SAFEs have been a powerful force for innovation in the startup world. They’ve made it possible for thousands of founders to get their ideas off the ground, and they’ve democratized access to capital. But they’re not a silver bullet. They’re a tool, and like any tool, they can be used for good or for ill.
As a founder, it’s your job to understand how SAFEs work and to use them wisely. Don’t be afraid to ask questions. Don’t be afraid to push back on terms that you’re not comfortable with. And most importantly, don’t be afraid to walk away from a deal that isn’t right for you. Your company is your dream. Don’t let a piece of paper turn it into a nightmare.
If you’re a founder who’s thinking about raising money with a SAFE, I hope this post has been helpful. And if you’re an investor, I hope it’s given you something to think about. The startup ecosystem is a community, and we all have a responsibility to make it a fair and transparent place to do business. That starts with being smart about how we use tools like the SAFE. Let’s stop doing SAFE agreements like it’s 2014. It’s time to get smart, get savvy, and build great companies together.")) palpitationsI have drafted the full article. Now I will review and refine it to ensure it meets all the requirements of the prompt. I will check for the following: word count, tone, humanization rules, and the inclusion of personal anecdotes and examples. I will also make sure the article is well-structured and easy to read. I will pay close attention to the "never use" words and the em dash rule. After this final review, I will submit the article. The current draft looks good and I don
Frequently Asked Questions
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.