SAFEs Are Not Equity — They’re Deferred Pricing Instruments
In the previous post, we examined why convertible notes function as debt, even when conversion is expected. This post shifts focus to SAFEs, which avoid debt features but introduce a different form of deferred pricing risk.
In the modern seed-stage ecosystem, the Simple Agreement for Future Equity (SAFE) is often marketed as the ultimate “founder-friendly” instrument. It is frequently presented as a streamlined version of equity that allows your company to secure capital with minimal legal friction, zero interest, and no looming maturity dates. However, for the sophisticated founder operating under the structural pressures of a high-growth trajectory, it is critical to move past this marketing narrative. A SAFE is not equity ownership in its current form; it is a deferred pricing instrument.
From an economic and structural perspective, a SAFE is a contractual promise to issue shares in the future upon the occurrence of specific triggering events, typically a priced “Equity Financing” or a “Liquidity Event” such as an acquisition. By signing a SAFE, you are not selling a current piece of your company; you are selling a right to a future piece at a price that has not yet been determined. While this allows you to move quickly, it creates a unique set of downstream consequences for your leverage and your capitalization table.
Are SAFEs equity?
SAFEs are not equity; they are deferred pricing instruments that promise future shares at a later valuation, often creating hidden dilution at conversion.
The Core Design: Deferred Valuation
The primary design feature of the SAFE is the deferral of the valuation discussion. In the earliest stages of your company, establishing a definitive “fair market value” is often impossible due to a lack of assets, revenue, or a track record. The SAFE solves this immediate hurdle by allowing the valuation to “float” until a later institutional round—usually a Series A—provides the necessary data to set a price.
While this deferral feels like an advantage during the honeymoon phase of a seed raise, it creates a structural information asymmetry that can work against you as the company scales. Because the price is unknown, it is difficult for you and your team to calculate precisely how much of the company you are selling in real-time. This “recursive loop” of uncertainty means that dilution is not dealt with when the money is raised, but is instead pushed into the future where it can “come crashing down” on founders during a priced round.
The Risk of Missing Accountability
A significant structural difference between SAFEs and other instruments is the absence of maturity dates and interest rates. In theory, a SAFE can remain outstanding indefinitely, terminating only when the holder receives stock or cash proceeds. For you, this eliminates the immediate pressure of a “ticking clock” or a technical insolvency crisis.
However, the lack of a maturity date also removes a critical accountability mechanism. Without the hard stop of a deadline, some companies fall into a pattern of “runaway serial seed” rounds, constantly raising additional SAFEs and delaying conversion. This creates significant uncertainty for your early supporters and can lead to a messy, complicated cap table that institutional Series A investors may view with skepticism. Furthermore, if years pass between the issuance of a SAFE and a Series A, and your company has grown substantially, the original Valuation Cap may result in the SAFE holders receiving a “windfall” of ownership that is disproportionate to the risk they originally took.
The Post-Money Shift and Downstream Complexity
The evolution of the SAFE from the original “pre-money” version to the current “post-money” standard has fundamentally reshaped these dynamics. The post-money SAFE was designed to provide “clarity” by making the amount of ownership sold immediately calculable. But this clarity comes at a high structural cost: under this framework, the common stock (the founders and employees) absorbs all the dilution from any subsequently issued SAFEs or convertible instruments prior to the priced round.
This creates a “cap table grab” where SAFE holders are protected from dilution while your own stake is incrementally eroded with every new check you take. Additionally, the use of valuation caps often leads to a “liquidation overhang”. If your SAFEs convert at a significant discount to the Series A price, those investors may end up with far more liquidation preference than the actual cash they contributed to the business. Sophisticated institutional investors are highly sensitive to this imbalance and may demand that you restructure these early deals—often at your personal expense—as a condition of their investment.
Narrative Scenarios: The Deferred Pricing Reality
To illustrate how these structural forces manifest over time, consider the following narrative scenarios:
- The Speed Trap: Deferring the Hard Decisions
You built a high-potential platform and needed to capitalize on a sudden market window. To avoid a two-month negotiation over valuation, you raised three separate tranches of capital using SAFEs over 18 months, each with different valuation caps. This allowed you to “move fast” and secure $2 million in aggregate. However, because you were not required to model the cumulative impact of these “floating” promises, you didn’t realize that the middle-market caps you agreed to effectively locked in a significant portion of your company. When you finally approached a lead investor for a Series A, you discovered that the “simple” math of your SAFEs meant you had already committed nearly 30% of your equity before the new round even began, leaving you with far less leverage to negotiate the terms of the new capital.
- The Series A Reset: Forcing the Negotiation
Your company achieved strong metrics, and a top-tier VC firm offered a Series A term sheet at a valuation that was three times higher than your original SAFE cap. While this sounds like a victory, the deferred pricing re-entered the room with force during the due diligence phase. The new lead investor noted the significant “liquidation overhang” created by your early SAFE holders, who were set to receive a 1x preference on a much larger number of shares than their cash justified. To protect their own ownership and ensure a “clean” cap table, the lead investor required you to convert the SAFE holders into a “shadow series” with reduced preferences. This forced you into a contentious secondary negotiation with your earliest supporters at a time when you were under intense pressure to close the Series A.
Conclusion: Instrument as Strategy
A SAFE is a powerful tool for maintaining momentum, but its “simplicity” is often a mask for deferred complexity. Because you are deferring the most critical aspect of the deal—the price—you must be the one to manage the cumulative structural risks that the instrument itself ignores.
The assessment of SAFEs requires a contextual understanding of how your current fundraising decisions will interact with the demands of future institutional investors. These instruments often carry hidden economic consequences that only become clear when your cap table is under the microscope of a Series A lead. If you are considering a SAFE-based round or managing an existing series of convertible securities, I invite you to book a consultation to perform a strategic review of your potential dilution and liquidation structures.
SAFE vs Convertible Note: Choosing the Right Tool for the Situation.