Should venture investors be willing to invest via uncapped SAFEs (with no valuation cap)?

Rob Go · published Jun 23, 2023

In a power law business, getting into the best companies matters more than deal terms — worth doing things like an uncapped note that you'd otherwise never do.

Attentive, one of their biggest hits, was an uncapped note they never would have done before, and it made him realize you just want to be in the best companies.

Scope: not a licence to do uncapped notes left and right

49:40 20VC: How to Raise a Venture Fund from Deck to First Meetings to Final Close, Why Venture is a Young Person's Game and Why Multi-Stage Funds Have Not Ruined Seed with Rob Go, Co-Founder @ Nextview

David Tisch · published Feb 5, 2024

Investors should not have rules against instruments like uncapped SAFEs; the job is to get into the best companies by whatever mechanism, and for a truly best company today's price is the lowest point in its trajectory

Stupid rules block you from the best companies, and if it is the best company the current entry price will prove to be the cheapest you'll ever see

Scope: price logic holds only if it is genuinely the best company

82:45 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

Geoff Lewis · published Oct 5, 2022

With a company that prices every round to perfection, an uncapped note can counterintuitively be the cheaper way to get exposure than competing to lead the next priced round

They were outbid by ~$100M on the Series A and believed the business would clearly work, so competing on price in the next round would have cost more than deploying on an uncapped note

23:44 Uncapped note can be cheaper than competing to lead a perfectly priced round

Terrence Rohan · published Feb 5, 2024

Uncapped SAFEs are acceptable to invest in, provided there are provisions converting the note at some point if the company doesn't raise

82:35 Uncapped safes acceptable if conversion provisions exist

Paul Graham · published Oct 2010

The best deal for founders is a convertible note with no valuation cap, and VCs indifferent to valuation can use uncapped notes to make offers super-angels hate to match.

With an uncapped note the angel money converts at the next round's valuation however high; angels dislike this because they don't know how much of the company they're buying.

source Uncapped notes let price insensitive vcs make offers super angels cannot match

Paul Graham · published Sep 2013

Founders should avoid taking their first money from an over-eager investor at a price they can't sustain, and if they have eager first investors should use an uncapped convertible note with an MFN clause.

The first investor's price becomes your default asking price; lowering it later is possible but may cost you a bunch of leads, whereas an uncapped MFN note lets later investors set the cap.

source Founders should use uncapped mfn notes with over eager early investors to avoid setting price too low