In late 2013 Y Combinator released its innovative Simple Agreement for Future Equity (SAFE) investment instrument. The purpose of the SAFE was to allow pricing to be deferred in an early investment round, as early stage companies are somewhat difficult to value. YC wanted to take some of the benefits from Convertible Notes (which are debt) and make them available in equity form. Thus the SAFE was born.

With a SAFE, the company gets the funds straight away but the valuation is deferred until the next funding round (typically a Series A). It’s no surprise they’ve become very popular in early rounds.

But SAFEs aren’t always that safe. Sometimes founders stack multiple SAFEs on top of each other, then they run the risk that they wake up one morning and realise they hold a much smaller percent of their life’s work than they thought they did.

The second risk isn’t one that’s talked about much: that the company never raises a future round. If they never raise a round, then there may be no ability for the investor to trigger the equity conversion. This is exactly the situation faced by a16z and a number of other investors when they invested in the unicorn Toptal. (Read more here).