Uncapped SAFE

When a very young company needs money, nobody knows exactly what the company is worth. It often has only an idea, a few people, and no customers yet. Still, money needs to flow. That’s why there is a contract that simply postpones this question: the investor transfers a sum now and receives company shares later, once the value of the company is officially set during a proper financing round. This contract is called a SAFE, short for “Simple Agreement for Future Equity.” An Uncapped SAFE is the variant without a ceiling: no maximum value is agreed upon to which the investor will later be converted.

Who loses out when there’s no ceiling

The ceiling, called the “valuation cap” in English, is the actual point of contention in such contracts. With a cap, the rule is: no matter how valuable the company is later assessed to be, the early investor will be converted at most at this agreed value. If the company grows strongly, this means they get significantly more shares for their money. That is exactly their reward for getting in early and without collateral.

If the cap is removed, this reward largely disappears. The investor is then converted at the value that is negotiated later – perhaps with a small discount. An example: someone gives 100,000 euros, and a year later the company is valued at 50 million euros. Without a ceiling, they receive shares worth about 0.2 percent. With a cap of 5 million, it would have been ten times that.

For founders, an Uncapped SAFE is therefore the best possible deal. They give up hardly any shares and avoid the uncomfortable valuation question. However, they can only pull this off if many investors are competing for them. In practice, these contracts are seen almost exclusively with highly sought-after teams, for example with well-known founders or during hype phases such as the recent one around AI startups.

What happens when converting into shares

A SAFE is not a loan. There is no interest, no repayment date, and no obligation to ever pay the money back. The contract is a voucher for shares that gets redeemed at some point. The trigger is usually the next larger financing round, in which professional investors set a price per share.

At this moment, the SAFE is converted. The amount paid in is divided by the price per share, and the investor receives the corresponding number of shares. With an Uncapped SAFE, there is only one possible advantage: the discount, typically 10 to 25 percent off the price paid by the new investors. Some Uncapped SAFEs don’t even have this discount. In that case, the early investor is economically almost in the same position as if they had entered later.

It’s also important to know what happens if a financing round never comes. If the company is sold, the SAFE holder usually gets their money back or, alternatively, shares. If the company goes bankrupt, the money is generally gone. A lender would be better off in this case, because debt is paid out before shareholders.

Reading startup news correctly

The SAFE originates from the US startup program Y Combinator, which published it as a standard contract in 2013. The first version was uncapped. It quickly became unpopular because investors realized their early risk was not being rewarded. Today, the version with a cap is the norm, and uncapped is considered an exception reserved for especially sought-after companies.

In news about startups, SAFEs often appear hidden. When there’s talk of a “pre-seed round of 2 million,” what’s behind it is often not a sale of shares but a stack of such contracts. The phrase “without valuation” or “valuation still open” is a clear sign of this. For readers, it’s worth asking whether a cap was agreed upon – this reveals who had the upper hand in the negotiation.

In Germany, the SAFE is less common because share transfers must be notarized here. More widespread is the convertible loan, which works similarly but is legally a loan. There, too, there are variants with and without a ceiling, so the same basic question arises.