How Safe Are SAFE Agreements?

In the world of early-stage fundraising, the allure of the Simple Agreement for Future Equity, or  SAFE, often seems like a no-brainer choice for entrepreneurs.

Designed as a founder-friendly vessel to sail the choppy waters of early-stage funding, a SAFE agreement promises a straightforward path to securing capital without the immediate dilution of ownership or valuation discussions, allowing founders to focus on what they do best: building a company.

But here’s where the plot thickens: The seductive simplicity of SAFE agreements can sometimes lead to complications.

Picture this: You, the visionary founder, have built your startup over the past three years, growing from nothing to a successful business, clutching a handful of SAFE agreements along the way.

Then comes the moment of truth: an M&A opportunity or the much-anticipated priced financing round.

It’s time to cash in on your progress, to see the fruits of your labor reflected in your company’s valuation. But a stark realization dawns: Those SAFE investors, your early backers, haven’t been diluted through the journey. Instead, their share of the pie is determined by the cap you set in those initial agreements, a figure that now seems a distant echo of your company’s current worth.

The very cap that once offered protection to your early supporters now casts a long shadow over your company’s valuation, diluting your share more than you ever anticipated.

As tempting as it may be to view SAFE agreements as the golden key to easy funding, the savvy entrepreneur sees them for what they truly are: tools that require careful, strategic handling. The goal is not to avoid them but to engage with them wisely, considering the long game.

Imagine treating each SAFE agreement like a hot potato that needs to be converted as soon as possible. By adopting this mindset, you can avoid colossal dilutions that can even destroy future rounds and acquisition opportunities.

Itay Sagie is a strategic adviser to tech companies and investors, specializing in strategy, growth and M&A, a guest contributor to Crunchbase News, and a seasoned lecturer. You can connect with him on LinkedIn for further insights and discussions.