Using a SAFE (Simple Agreement for Future Equity) to raise funding can be an efficient and founder-friendly way to secure capital early on, but it’s not without its downsides. Here are the key risks and limitations to be aware of:

1. Founder Dilution Uncertainty
Issue: SAFEs delay the valuation discussion, so founders may not fully understand how much of the company they’re giving away until a priced round.

Why it matters: In a high-growth scenario, early SAFEs with large discounts or low valuation caps can result in unexpectedly high dilution when they convert.

2. Cap Table Complexity
Issue: Multiple SAFEs with different terms (valuation caps, discounts, MFNs, etc.) can lead to a messy cap table and make equity planning harder.

Why it matters: This can complicate future fundraising rounds, due diligence, or M&A activity.

3. Investor Misunderstanding or Reluctance
Issue: Some investors, especially outside of Silicon Valley, may not be familiar with SAFEs or prefer traditional convertible notes or priced rounds.

Why it matters: It might limit your pool of potential investors or require more legal/educational overhead.

4. No Immediate Ownership or Rights for Investors
Issue: SAFE holders don’t get equity or traditional investor rights (like voting or board seats) until conversion.

Why it matters: Some investors may see this as a negative, especially if they want more influence early on.

5. Debt vs. Equity Tax Treatment
Issue: SAFEs are not debt and are usually considered equity-like instruments, but their tax and legal treatment can vary by jurisdiction.

Why it matters: This can introduce legal ambiguity or tax implications for both founders and investors.

6. No Maturity Date
Issue: Unlike convertible notes, SAFEs don’t have a maturity date or interest, which can leave investors in limbo if a priced round doesn’t occur for a long time.

Why it matters: Founders may be under less pressure to raise a priced round, but investors may be stuck with non-converting SAFEs for years.

7. Valuation Cap Negotiations Can Be Tricky
Issue: While meant to delay valuation, most SAFEs still include a valuation cap—which is a proxy for valuation.

Why it matters: Investors will still negotiate hard on the cap, meaning you’re indirectly setting a valuation anyway, just without issuing equity yet.

Interested in raising capital for your company or project?  Call us today to discuss!  (720) 586-8610