Introduction

The SAFE (Simple Agreement for Future Equity) was introduced by Y Combinator in 2013 to simplify early-stage funding. Its premise is straightforward: an investor provides capital today in exchange for the right to receive shares in the future when the company raises its next equity round. SAFEs became the default instrument for pre-seed and seed rounds due to their simplicity and low legal overhead.

In Web3, the situation is unique: SAFEs are often used not just at the earliest stages but also for large, multi-million-dollar rounds, sometimes even in later stages where complexity and risks are much higher. But behind this simplicity lie significant gaps that can cost investors dearly. Below, we share three real cases that demonstrate why a standard SAFE alone is not enough, and what you can do to close these gaps.

Case 1: Forced Conversion via “Fake” Equity Financing

A company raises $3M in a seed round through standard SAFEs with a valuation cap. Later, the market cools, and the startup struggles to raise the next round at a desirable valuation. Normally, this isn’t catastrophic: SAFEs protect investors by converting at the lower price.

But here’s the loophole: the founder runs a $100K crowdfunding campaign on an equity platform, selling shares at a valuation above the SAFE cap. Technically, this qualifies as an “Equity Financing Event” under the SAFE, so the company converts all SAFEs at the highest allowed valuation, not the actual market price. Investors expecting downside protection suddenly find themselves vulnerable.

✅ Solution:

Define Qualified Equity Financing in the SAFE or side letter. For example:

“Qualified Equity Financing” means an equity financing in which the Company raises at least [$X million] of new money at least in part from new investors on an arm’s length basis in a single transaction or series of related transactions. No other equity issuance shall trigger automatic conversion.”

This prevents small or strategic rounds from being used to manipulate conversion terms.

Case 2: Radical Pivot After Raising Capital

A startup raises Seed round through SAFEs. Two months later, the founders realize the product is failing and decide to pivot to an entirely different industry — one completely outside the mandate of the original investors.

95% of the money is still in the bank, but investors can’t stop the pivot or recover their capital. A standard SAFE gives no governance rights, no consent rights, and no covenants restricting strategic direction. Investors end up funding a project they would never have backed.

✅ Solution:

Include a Company Purpose Definition and change-of-business restriction in a side letter:

“The Company shall conduct its business in accordance with the business plan and field of activity as set forth in [Annex X]. Any material change to the Company’s purpose or principal line of business shall require the prior written consent of holders of SAFEs representing at least [X%] of the Purchase Amount.”

This ensures investors have a say in major strategic shifts.

Case 3: IP Transfer to a New Company

The founder is heavily diluted after the SAFE round and cannot attract new investors on reasonable terms. A new investor offers to fund a new entity, on the condition that the IP is transferred there.

What stops the founder from moving the core IP out of the existing company?

Nothing.

Standard SAFEs have no IP protection provisions. There’s no restriction on asset transfers, and SAFE holders lack veto rights. The IP moves, the original entity becomes an empty shell, and SAFE investors are left with worthless paper.

✅ Solution:

Add an IP & Materials Assets Transfer Restriction in the SAFE or side letter:

“The Company shall not sell, assign, license (other than in the ordinary course of business), pledge, or otherwise transfer all or substantially all of its intellectual property without the prior written consent of holders of SAFEs representing at least [X%] of the aggregate Purchase Amount of all outstanding SAFEs.”

This creates a binding covenant preventing asset stripping.

Conclusion

The SAFE is a brilliant tool for one thing: giving founders fast access to capital with minimal friction. But the standard SAFE agreement does not protect investors from strategic risk, governance issues, or bad-faith actions.

If you are investing significant amounts or backing Web3 projects at later stages, a standard SAFE is not enough.

Use side letters to add:

• Qualified financing definitions

• Business purpose restrictions

• IP & Material Assets transfer covenants

Alternatively, for larger checks, consider transitioning to a full investment agreement with protective provisions.