Simple Agreements for Future Equity (SAFEs) are the preferred method for early stage startups to raise their first investment dollars. Recently, AI has made it possible for founders to attempt to self-manage the process of reviewing, negotiating, and executing SAFEs with early-stage investors. Is trusting AI to execute a complicated legal procedure really the best course for founders?

When raising money using Simple Agreements for Future Equity (SAFEs), a lot of the mechanical work can be done by the founder. The key is knowing which parts are safe to standardize and which parts justify bringing in legal expertise.

I am seeing that the best founders are especially great at bringing in legal counsel at targeted moments during their company's fundraising process. For example, I often get calls from clients at times where there are inherent risks to agreeing to terms, or when these have material impacts on the ownership and control of the company. In these moments, the implications are real: founders can face substantial dilution if these agreements are not executed according to plan.

What Is a SAFE and Why Is Everyone Using It?

A SAFE allows an investor to invest money in your company today for the right to receive equity in a future "priced" round or at an exit. SAFEs have become a default in early-stage ventures because investors and founders alike are familiar with the terms and the industry has agreed to a default form, which leads to savings in costs and time.

Because SAFEs are standardized and often not heavily negotiated, founders do not need a lawyer in the room for every individual SAFE they sign. But this does not mean that company counsel should be absent from the process, which is further explained below.

Terms to Know

As a bare minimum, founders should know the following terms, which dictate even the most basic of SAFE negotiations:

• Purchase amount: This is the amount the investor is putting into your company. You should model how much total capital you want to raise in this SAFE round and how those checks stack up against your growth plan.

• Post-money valuation cap: This cap will be compared to the valuation negotiated in your next priced round to determine the conversion price for the SAFE. Put simply, a lower cap is more favorable to the investor and more dilutive to you; a higher cap is the opposite. Founders often model worst-, typical-, and best-case valuations and divide potential SAFE investments by each valuation estimate to see how much dilution they will experience. Doing so allows founders to proactively avoid giving up too much of the company.

• Discount rate: If offered, the discount lets the SAFE investor convert into equity at a lower price per share than new investors in the priced round. A discount rate functions as downside protection to the investor, triggering only when a raise occurs with a valuation lower than their cap.

What Can Founders Handle on Their Own?

In a typical early SAFE round, founders routinely handle most of the following:

• Selecting a standard, unmodified post-money SAFE template (Y Combinator is the current standard).
• Filling in basic deal terms:
  • Purchase amount (how much the investor is investing).
  • Post-money valuation cap (the maximum valuation at which the SAFE will convert).
  • Discount rate, if offered.

• Running simple scenarios to see how much equity a given check size and valuation cap translate into at different future valuations.

When Is It Risky to Proceed Without Counsel?

Call your lawyer if the investor insists on the following:

• Changes to the standard SAFE. If an investor wants to "tweak" language, insert a side letter, or use their own template, it is advised to have your corporate counsel review it. These custom changes often hide additional economic rights or control terms that can drastically affect future fundraising and governance.
• Special economic or control rights. Some investors will ask for special rights within side letters or redlines to the SAFE template, all of which should trigger a legal review. Examples include:
  • Economic rights
  • Control or veto rights.
  • Information or approval rights.
  • Board seats, board observer rights

• Aggressive valuation caps and/or discounts. Low caps and generous discounts can become diligence red flags that undermine a company's ability to raise later rounds or retain meaningful founder ownership.

At these points, a startup attorney who has seen how these terms play out in previous deals can protect you from unintended consequences.

A Simple Founder Checklist for SAFE Rounds

Use this checklist to decide what you can do yourself and when to loop in counsel:

1. Build a fundraising plan with rough valuations (bear, base, bull) and the total amount you intend to raise.
2. Fill out a standard, widely accepted SAFE template with your proposed purchase amounts, valuation caps, and any discounts.
3. Model dilution risks by looking at how much ownership each SAFE investor could end up with in different valuation scenarios.
4. Confirm there are no side letters, redlines, or "special provisions" beyond the base SAFE.
5. Call company counsel immediately if:
   • An investor asks for special rights or non-standard provisions.
   • There is uncertainty on how the company’s valuation caps or discounts fit into the larger picture, or whether they are “market” or sustainable.
   • The company is planning on raising a priced round and needs to ensure its SAFE investments will convert cleanly.

Following this checklist helps you reduce legal spend on routine tasks while still giving your attorney a chance to protect you from unfavorable negotiating outcomes.

Charlie Sommers is a startup and venture capital attorney based in Chicago, IL. He represents founders, startups, and venture capital funds in a wide variety of corporate transactions, including raising capital and navigating issues associated with rapidly-growing startups. He can be reached at csommers@founderslaw.com.