SAFE Notes Are (Again) for Suckers
- Langston Tolbert
- Jan 21
- 4 min read
Updated: Jan 29
SAFE notes—Simple Agreements for Future Equity—have become the gold standard for early-stage financing in the tech world. Their standardization and quick execution make them the go-to option for venture-backed startups. But as with anything that becomes popular, their use has bled over into arenas where they don’t belong, creating potential landmines for founders and investors alike. Let’s talk about why this is happening, the consequences, and what to consider before jumping on the SAFE train.
The Problem With Popularity
SAFE notes were designed with a specific purpose: to make early-stage fundraising easier for tech startups. Tech companies often can’t rely on traditional valuation methods like discounted cash flow (DCF) analysis because they’re pre-revenue or not yet profitable. Instead, their value is determined by venture capital-specific metrics—things like comparable company analyses or projected market dominance. SAFEs were born from this world, where fast-paced deal-making and speculative growth are the norm.
But because they’re quick and easy, SAFE notes have started appearing in industries where they don’t fit. Founders in non-tech industries—restaurants, retail, manufacturing—are using SAFEs because they want money fast, and investors unfamiliar with the nuances of venture capital think, “If it’s good enough for Silicon Valley, it’s good enough for me.” But these industries often rely on traditional financial metrics like profitability and steady cash flow, which are fundamentally different from the speculative growth model of tech startups. As I pointed out in my earlier article, SAFEs lack key features like maturity dates and interest rates, which can provide necessary incentives and safeguards for investors. Applying SAFEs to businesses outside of the venture ecosystem can leave both founders and investors vulnerable to unforeseen risks. Spoiler alert: it’s not.
Why Context Matters
Here’s the thing: SAFEs are not one-size-fits-all. They were designed for companies that will eventually issue preferred equity in a venture-backed structure. In other words, the expectation is that the company will raise additional funding at higher valuations and issue shares that have specific rights, preferences, and privileges. That’s not how most non-tech businesses operate.
Take a restaurant, for example. It’s much more likely to rely on traditional profitability metrics and grow steadily over time. Using a SAFE in this context makes about as much sense as using a DCF model to value a pre-revenue SaaS startup. It just doesn’t fit.
The same goes for angel investors who dive into SAFEs without understanding their context. Many don’t realize that terms like valuation caps and discounts were designed with venture-backed companies in mind. If the business never raises another round or doesn’t issue preferred stock, what happens to their investment? It’s a recipe for confusion—and potentially, for loss.
The Illusion of Standardization
A big selling point for SAFEs is their “standardization.” Founders and investors love the idea of a plug-and-play document that eliminates the need for lawyers (and their fees). But here’s the catch: just because something is standardized doesn’t mean it’s foolproof.
SAFEs often require negotiation and customization to fit the specific deal. For example:
Does the SAFE make sense for the type of business?
Are the valuation cap and discount terms reasonable?
What happens if the company never raises another round?
Without a lawyer’s guidance, it’s easy to overlook these questions. And in industries where investors and founders are often novices, the consequences can be disastrous. A poorly negotiated SAFE can leave founders giving away too much equity or investors holding an instrument with little to no actual value.
The Risk of Removing Lawyers
Look, I get it: lawyers can be expensive, and startup founders are often strapped for cash. But the trend of cutting lawyers out of the process entirely is a dangerous one. In early-stage financing, where deals are as much about strategy as they are about structure, having a seasoned advisor can be the difference between success and catastrophe.
When founders and investors attempt to DIY their legal documents, they’re playing with fire. They might not understand the implications of a specific term or how it aligns with their long-term goals. They might not even realize that a SAFE isn’t the right tool for the job. Standardization can’t replace context, and legal advice isn’t just about drafting documents—it’s about making sure the deal makes sense.
How to Approach SAFE Negotiations
So, what should you do if you’re considering a SAFE? Start by asking these questions:
Does a SAFE even make sense for this business? If the company isn’t planning to issue preferred equity or isn’t operating in a venture-capital ecosystem, think twice.
What are the terms? Make sure you understand the valuation cap, discount rate, and other key provisions. Are they fair and reasonable?
What’s the exit strategy? If the company doesn’t raise another round or issue stock, how will the SAFE convert or pay out?
Who’s guiding this process? Don’t assume you can navigate this alone. Bring in someone who knows what they’re doing—preferably, a lawyer.
Final Thoughts
SAFE notes have their place, but they’re not a universal solution. As I’ve discussed before, SAFEs often fail to provide sufficient incentives for investors—things like maturity dates and interest rates, which aren’t just formalities but critical tools that protect investments and create accountability for founders. Founders and investors need to understand the context, mechanics, and implications before signing on the dotted line. And while the allure of standardization is strong, don’t let it blind you to the complexities of early-stage financing. Sometimes, spending a little more time (and money) upfront can save you a world of trouble later.
The bottom line? Don’t get SAFE notes confused with safe bets. Always negotiate with your eyes wide open—and with the right advisors by your side.
Comments