SAFE Agreements: The Deferred Negotiation Many Founders Do Not Realise They Have Already Started
SAFE agreements have rapidly become one of the most widely used financing instruments in the start-up ecosystem.
For many founders, they appear to offer an ideal solution. Capital can be raised quickly. Valuation discussions can be deferred. The legal process feels simpler. The transaction is often less expensive and less time-consuming than a traditional funding round.
It is easy to understand why SAFE agreements have become so popular. However, much of that popularity is built on a misunderstanding. SAFE agreements do not eliminate difficult questions around valuation, ownership and control. They postpone them.
And when those questions eventually return, they are often far more complex than they would have been at the outset.
What Is a SAFE Agreement?
SAFE stands for Simple Agreement for Future Equity. The instrument was developed by the American start-up accelerator Y Combinator as a simpler alternative to convertible loan notes and traditional equity financing rounds. In practice, an investor provides capital today in exchange for the right to receive shares at a future financing event, subject to the terms set out in the agreement.
Unlike a convertible loan note, a SAFE is generally not structured as debt. It typically carries neither interest nor a maturity date. This is one of the reasons many founders perceive SAFE agreements as simpler and more founder-friendly.
The question is whether that perception is always justified.
SAFE Agreements Do Not Really Solve the Valuation Question
SAFE agreements are often described as a way of raising capital without having to value the company. From a legal perspective, that is broadly correct. From an economic perspective, it is far more debatable. Most SAFE agreements contain a valuation cap, a discount mechanism, or both. These provisions determine how many shares the investor will ultimately receive when the SAFE converts.
The valuation question therefore still exists. The difference is that it is addressed indirectly rather than directly. In reality, SAFE agreements rarely eliminate valuation negotiations.
They simply defer them.
The Deferred Negotiation
Perhaps the most interesting aspect of SAFE agreements is that they are often presented as a way of avoiding negotiations. In reality, they are frequently negotiating in disguise. When founders and investors discuss valuation caps, discounts and conversion mechanics, they are already negotiating future ownership.
The difference is that the consequences are not immediately visible. Founders naturally focus on the amount of capital entering the business today. Experienced investors often focus on something else entirely: the percentage of the company they may effectively own if the business succeeds.
Viewed through that lens, SAFE agreements are not fundamentally about financing. They are about the allocation of future economic value.
Why Investors Often Like SAFE Agreements More Than Founders Realise
SAFE agreements are frequently marketed as founder-friendly instruments. That is not wrong. It is simply not the whole story. For investors, SAFE agreements offer several strategic advantages. They provide exposure to future growth before a market valuation has been fully established. They often avoid lengthy negotiations and substantial transaction costs. In addition, valuation caps and discounts can give investors more favourable economics than those available to investors participating in a later funding round.
From an investor’s perspective, a SAFE can therefore be an efficient way of securing future upside at a relatively modest cost. That does not mean SAFE agreements are inherently unbalanced. It does mean founders should recognise that they were not created solely for their benefit.
The Hidden Dilution
When shares are issued in a traditional equity round, dilution is immediately visible. SAFE agreements work differently. The dilution often exists economically from the moment the agreement is signed, but it may not become visible legally until conversion takes place. This can create a false sense that founders have retained more ownership than they actually have. Every SAFE agreement represents future ownership that is not yet reflected in the share register. The more SAFEs a company issues, the greater the gap between the formal ownership structure and the underlying economic reality.
When a professional investor conducts due diligence, one of the first questions is often:
What does the cap table look like on a fully diluted basis?
Founders are sometimes surprised by the answer.
The Complexity Does Not Disappear
SAFE agreements are relatively easy to execute. That does not mean they are always easy to live with. The simplicity of the initial financing event often means complexity is pushed into the future. Multiple SAFEs with different terms can create uncertainty around ownership, conversion mechanics and future fundraising. New investors may seek to renegotiate existing arrangements. Cap tables become more difficult to analyse. Future financing rounds can become more complicated than founders originally anticipated.
SAFE agreements rarely eliminate complexity. More often, they redistribute it over time.
SAFE Agreements and Future M&A Transactions
One issue that receives surprisingly little attention is the impact SAFE agreements can have on a future sale of the business. When a prospective acquirer conducts due diligence, the objective is not simply to understand the business itself. The buyer also wants to understand precisely who is entitled to future value.
Where multiple SAFE agreements exist with different terms, questions may arise regarding conversion rights, dilution mechanics and the allocation of sale proceeds. The more complicated the ownership structure becomes, the greater the risk that a transaction becomes slower, more expensive or more uncertain. This does not mean SAFE agreements prevent acquisitions. It does mean they can affect how straightforward a company is to acquire.
SAFE Agreements in a Swedish Context
SAFE agreements were developed for the US venture capital market. That market benefits from a high degree of standardisation, established market practice and investors who are familiar with the instrument. Sweden has a thriving start-up ecosystem, but the environment is different. Funding rounds often involve a mix of angel investors, family offices, venture capital funds and strategic investors with varying levels of experience and differing expectations.
What works smoothly in Silicon Valley does not always translate seamlessly to Stockholm. For that reason, SAFE agreements should never be evaluated in isolation. They should be assessed in light of Swedish corporate law, the company’s ownership structure, future capital requirements and long-term strategic objectives.
When a SAFE Agreement May Be the Wrong Choice
It is tempting to view SAFE agreements as the default solution for early-stage fundraising. In some situations, they are highly effective. In others, alternative structures may be more appropriate.
If the company already has a reasonably clear valuation, a traditional equity round may provide greater transparency. If institutional capital is likely to be raised in the near future, multiple SAFEs can introduce unnecessary complexity.
Conclusion
SAFE agreements are neither founder-friendly nor investor-friendly by definition. They are tools for managing uncertainty. The real question is not how quickly a SAFE can bring capital into the business. The real question is who ultimately bears the consequences once that uncertainty disappears. The most successful founders do not focus solely on today’s funding round. They are already thinking about what the ownership structure will look like once the business succeeds. That is often where the most important negotiations are truly decided.
Forsety Legal advises entrepreneurs, start-ups and growth companies on fundraising transactions, investment structures and financing arrangements. We help clients understand how different funding solutions affect ownership, corporate governance and long-term growth.
If you are considering a SAFE agreement or would like to discuss alternative financing structures for your business, we would be pleased to arrange an initial consultation.
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