An uncapped SAFE is a Simple Agreement for Future Equity that converts to equity at the next funding round's valuation without a predetermined maximum valuation. Investors receive equity at the Series A price minus a discount (typically 10-25%), providing simple terms but no downside protection.
What is an Uncapped SAFE
An uncapped SAFE represents the simplest convertible equity structure. Unlike capped SAFEs or convertible notes, it lacks a maximum valuation reference point for investors while eliminating complex valuation negotiations for founders.
Developed by Y Combinator in 2013, uncapped SAFEs typically include only a discount rate (10-25%, most commonly 15-20%) without a valuation cap. This means investors convert at whatever price per share the Series A establishes, reduced by their discount percentage. The simplicity makes these instruments ideal for pre-seed stage companies with strong founder leverage.
Uncapped vs Capped SAFE
The valuation cap fundamentally determines investor protection and dilution impact:
| Feature | Uncapped SAFE | Capped SAFE |
|---|---|---|
| Valuation Protection | None—converts at round price | Cap limits maximum conversion price |
| Investor Risk | Higher—unlimited dilution potential | Lower—cap provides downside protection |
| Founder Dilution | Lower at high valuations | Higher—investors get more equity |
| Negotiation Speed | Fast—minimal terms | Slower—cap valuation must be negotiated |
| Typical Use Case | Pre-revenue, strong founder leverage | Institutional investors, post-revenue |
Practical Example: A 15% discount uncapped SAFE converting at a $10M Series A valuation converts at $8.5M ($10M × 0.85). A comparable capped SAFE with a $5M cap would convert at $4.25M ($5M × 0.85), yielding 4x more equity for the investor. Conversely, if the Series A reaches $100M, the uncapped investor's 15% discount still applies ($85M effective), while the capped investor locks in the $5M cap.
How Uncapped SAFE Conversion Works
When a qualifying equity financing occurs (typically a Series A or Series B priced round of $1M+), the uncapped SAFE automatically converts to the same stock class issued to new investors.
Conversion Formula and Mechanics
Standard Conversion Calculation:
Conversion Price = Series A Price × (1 - Discount Rate)
Shares Received = Investment Amount ÷ Conversion Price
Example: A $100,000 uncapped SAFE with a 20% discount converting at Series A with a $2.00 per share price:
- Conversion Price: $2.00 × 0.80 = $1.60 per share
- Shares Received: $100,000 ÷ $1.60 = 62,500 shares
Conversion timing occurs immediately before Series A closing, ensuring SAFE holders are included in the cap table baseline. Unlike convertible notes requiring bondholder approval, uncapped SAFEs convert automatically by their contract terms.
Discount Rate Impact
The discount compensates early investors for timing risk without creating a valuation reference. Rates typically range from 10-25%:
| Discount Rate | Market Conditions | Impact on Ownership |
|---|---|---|
| 10-15% | Hot company, strong founder leverage | Lower equity, competitive market |
| 15-20% | Standard early-stage | Balanced incentive and dilution |
| 20-25% | Higher risk, limited traction | Greater equity protection |
A $50,000 investment at a $1.50 Series A price yields different results by discount:
- 10% discount: $1.35 price = 37,037 shares
- 20% discount: $1.20 price = 41,667 shares
- 25% discount: $1.125 price = 44,444 shares
A higher discount directly increases investor equity but may signal company risk or founder desperation to institutional investors conducting due diligence.
Most Favored Nation (MFN) Protection
Some uncapped SAFEs include an MFN provision that automatically upgrades terms if the company issues better SAFEs to later investors. If your uncapped SAFE has 15% discount and the company later issues 20% discount SAFEs, your discount upgrades to 20%.
Advantages and Disadvantages
Benefits for Startups
Founders securing uncapped SAFE terms gain significant operational advantages:
- No valuation negotiation - Eliminates contentious discussions about company worth before Series A
- Faster closing - Simple terms close in 1-2 weeks vs 4-8 weeks for priced rounds
- Lower legal costs - Standard templates cost $0-$2,000 vs $10,000-$50,000 for priced rounds
- Minimal investor rights - No board seats, information rights, or governance constraints
- Flexible operations - Maximum decision-making autonomy
A pre-seed company can close multiple $100K SAFE investments within days using Y Combinator's standard template, preserving runway and maintaining founder control.
Investor Risks and Returns
Investors face substantial risks with uncapped SAFEs, particularly dilution at high Series A valuations:
Key Investor Concerns:
- No downside protection - Unlimited exposure to high valuations
- Uncertain ownership - Impossible to calculate equity percentage until Series A closes
- Limited rights - Typically no board seat, information rights, or voting power
- Potential for negligible returns - Even successful exits may yield below-target venture returns
Return Scenario Analysis:
| Scenario | Investment | Series A Valuation | Shares | Ownership | Exit at $200M |
|---|---|---|---|---|---|
| Low Valuation | $100K | $5M | 25,000 | 2.5% | $5M |
| Medium Valuation | $100K | $20M | 6,250 | 0.625% | $1.25M |
| High Valuation | $100K | $50M | 2,500 | 0.25% | $500K |
Consider: A $100,000 uncapped SAFE with 20% discount at a $50M Series A valuation converts at $1.60 per share, yielding just 62,500 shares or 0.25% ownership. Even a $500M exit yields only $1.25M (12.5x return), below institutional venture capital targets (20-30% IRR minimum).
When Investors Accept Uncapped Terms
Sophisticated investors accept uncapped SAFEs when:
- Portfolio strategy - Small check sizes ($25K-$100K) across 50+ investments diversify risk
- Access and relationships - Securing position with high-potential founders
- Market competition - Accepting founder-friendly terms to win deals vs competitors
- Option value - MFN and pro rata rights provide upside if future terms improve
- Signal value - Early participation attracts follow-on investors
Uncapped SAFE Use Cases
Uncapped SAFEs work best in specific circumstances where simplicity and speed outweigh structured protections.
Optimal Scenarios:
- Pre-product companies with no revenue or valuation benchmarks
- Very early stage (pre-seed, before institutional capital)
- Small amounts ($100K-$500K) where legal costs are material
- Strong founder leverage with multiple competitive investors
- Rapid iteration where company trajectory changes weekly
- Post-accelerator funding (e.g., Y Combinator extension)
Conversely, avoid uncapped terms for larger rounds ($1M+), post-revenue companies with valuation benchmarks, strategic investors requiring governance, or when founder experience suggests professional guidance is needed.
Real-World Examples
Favorable Outcome: Growth Success
A company raises $400,000 on uncapped SAFEs with 20% discount. Twelve months later, Series A at $30M pre-money ($1.50/share on 20M shares).
Conversion: $400,000 ÷ ($1.50 × 0.80) = $400,000 ÷ $1.20 = 333,333 shares (1.4% ownership)
Despite early investment, SAFE holders own just 1.4%. A $8M cap would have yielded 5.3%—nearly 4x more equity.
Unfavorable Outcome: Explosive Growth
A company raises $150,000 on uncapped SAFEs with 10% discount. Series A 18 months later at $100M pre-money ($5.00/share).
Conversion: $150,000 ÷ ($5.00 × 0.90) = $150,000 ÷ $4.50 = 33,333 shares (0.17% ownership)
SAFE investors own 0.17% despite investing when the company was pre-revenue. At a $1B exit, they receive $1.7M (11x)—below venture return expectations for such early risk.
MFN Activation
An investor provides $100,000 with 15% discount and MFN rights. Three months later, company issues SAFEs with $10M cap and 20% discount. MFN upgrades the first investor's terms.
At Series A ($20M pre-money, $2.00/share):
- Without MFN: $2.00 × 0.85 = $1.70 (58,824 shares)
- With MFN upgrade: $10M cap converts at $1.00 (100,000 shares)
MFN doubled investor ownership by converting the uncapped SAFE to a capped one.
Frequently Asked Questions
What is an uncapped SAFE?
An uncapped SAFE is a Simple Agreement for Future Equity without a valuation cap that converts to equity at the next funding round's price minus a discount rate (typically 10-25%). It provides no maximum conversion price protection.
How does an uncapped SAFE differ from a capped SAFE?
Uncapped SAFEs lack a valuation cap and convert at whatever Series A price is set. Capped SAFEs include a maximum valuation for conversion, providing more equity to investors when companies achieve high Series A valuations.
Why would an investor accept an uncapped SAFE?
Investors accept uncapped SAFEs for portfolio diversification (small checks across many companies), to access competitive deals with strong founder leverage, or when MFN and pro rata rights provide meaningful upside options.
What discount rate is standard for uncapped SAFEs?
Standard rates range from 15-20%, with 10-15% for hot companies where founders have leverage and 20-25% for higher-risk situations. Rates rarely exceed 25%.
Conclusion
Uncapped SAFEs provide simplicity and speed for early-stage fundraising but expose investors to significant dilution at high Series A valuations. Founders benefit from minimal negotiation and faster closes, while investors accept uncertainty about final equity ownership. Success depends on matching the instrument to company stage (pre-revenue, pre-seed), fundraising size ($100K-$500K), and founder leverage. For companies raising larger rounds or at more mature stages, capped SAFEs or priced equity rounds provide appropriate investor protections and clearer economics.