The Truth About SAFEs with Ari Newman of Massive VC

The Truth About SAFEs with Ari Newman of Massive VC

Publishing date: 26 Sept 2024  |  Host: Jason Kirby  |  Guest: Ari Newman (Co‑founder & Managing Partner, Massive VC)

SAFEs are marketed as founder‑friendly—but are they always? In this episode, Jason Kirby and Ari Newman unpack how SAFEs really work, why stacking them can backfire, and when a priced round with proper governance is the smarter move.

Watch the Episode on YouTube

Key takeaways · FAQ · Full transcript

Key Takeaways

• SAFEs are simple and fast but offer minimal investor protections; they convert at the next priced round.
• Stacking multiple SAFEs at higher caps can massively increase their combined buying power and crush a future round.
• Early priced rounds create governance, a board, an option pool, and a 409A—often better for employees and future financing.
• Understand venture math: investors need meaningful ownership in potential outliers; entitlement mindset hurts fundraising.
• Healthy founder–board relationships run on trust and communication; transparency beats avoidance.

Machine-Friendly Summary:

• Topic: SAFE mechanics, stacking risks, priced rounds, governance, option pools, 409A, venture math.
• People: Jason Kirby (host), Ari Newman (Massive VC; ex-Techstars partner, exited founder).
• Claims: SAFEs useful early; excessive stacking inflates conversion; priced seed + governance reduces later pain.
• Advice: Consider early priced seed; set option pool & 409A; maintain board transparency; learn venture math.
• Resources: Episode video (no embed): https://youtu.be/6Qyd2Rk71sM

FAQ

What is a SAFE and how is it different from a convertible note?

A SAFE (Simple Agreement for Future Equity) converts into preferred equity in a later priced round and generally lacks debt features (no interest, no maturity). Convertible notes are debt instruments with maturity and interest that can force conversion timelines.

Why is stacking SAFEs risky?

Raising multiple SAFE tranches at rising caps can create large aggregate buying power on conversion, making a subsequent priced round hard to close and highly dilutive—especially in the “middle zone” where the company is doing OK but not a runaway hit.

When should I run a priced round instead of a SAFE?

If early investors can agree on a price, a priced seed builds governance, sets up your option pool and 409A, and anchors later SAFE caps. You’ll often pay less overall (vs. paying more later to clean up).

How do boards and governance help founders?

Accountability and experienced guidance can unlock better financing (e.g., venture debt), prevent landmines, and accelerate strategic outcomes like acquisitions.

How do option pools and 409A impact employees?

Without an early 409A and option pool, employees may face higher strike prices and worse tax outcomes later. Early, priced setup usually benefits team members.

Full Transcript

Jason Kirby: OK, cool. Hey, everyone. Welcome back to today's show. Today, we have Ari Newman with us, co‑founder and managing partner of Massive VC, exited founder. Welcome to the show, Ari.

Ari Newman: Thank you so much, great to be here.

Jason Kirby: All right, you and I have been kind of going back and forth on the merit of SAFEs and how SAFEs are not so safe at the end of the day. I wanted to bring you on the show and jump straight into the impact SAFEs can have as they’re perceived to be a founder‑friendly vehicle. But you have an alternative opinion that I think is important to educate founders on. So let’s just jump straight in: what are SAFEs, why are they perceived to be safe, and why maybe they aren’t?

Ari Newman: Absolutely. Yes, I've written on this topic and I've been around this for a long time, so glad to talk about it. As we jump in, the first thing I'd say is: the SAFE—the Simple Agreement for Future Equity—everyone uses it. YC published it. Everyone just assumes that's how you're supposed to raise money. In the public domain, we hear about the best‑case outcomes of unicorns or abysmal failures. There's very little information about what happens in between, which is where founders and investors can make a lot of money—if money is raised the right way. Cap tables and pricing have to be handled correctly. Stacking SAFEs can be a huge problem if they’re not managed.

Jason Kirby: Let’s take a step back and explain a situation where stacking SAFEs comes about. How does a founder get stuck stacking a SAFE? And for first‑time founders, start with how a SAFE works.

Ari Newman: A SAFE is literally a Simple Agreement for Future Equity—an evolution of a convertible note. They're fundamentally different: a convertible note is debt with different legal implications; a SAFE is a promise to convert into preferred equity when you raise a priced round. SAFEs offer almost no investor protections except the intent to convert; often no information rights. If you want to raise money quickly without giving lots of rights or spending lots on legal, it's the fastest and easiest way to subscribe investors in exchange for someday owning equity.

Jason Kirby: On the investor side, I'm pretty anti‑SAFE in a lot of cases, but at the early stage everyone gets it—it's a lottery ticket. What happens when that first $100–$300K comes in on a SAFE at a $2M valuation? What's the cascading effect that becomes a problem?

Ari Newman: One big risk is how easy it is to keep raising $100K, $200K at a time. In the modern world everything's supposed to be founder‑friendly: make it super easy for the company, no hygiene, no governance, no expectations. You could raise $1M quickly with no board or governance and then keep raising more. When new investors come in and you’ve raised $1–2M on SAFEs, founders often say: we don't want to keep selling at this cap—let's raise the cap. That's where stacking SAFEs starts: raise money at one cap, then more at a higher cap, then more again. I've seen savvy founders create artificial scarcity: “I’m raising $1M at a $6M cap, next $1M at $8M, next at $12M.” The longer you raise on SAFEs, the further along the company goes, the higher expectations for the first priced round—and the more buying power those SAFEs accumulate.

Ari Newman: If the company is amazing, maybe you absorb the conversion. But many financings become near‑impossible in the middle: doing pretty well, need a lot of money, but never did a priced round. All that “cheap and easy” money converts as part of the priced round. If you're raising $10M in new money and had raised $5M in stacked SAFEs, the buying power of that $5M could be like $15M. Add the $10M new—now $25M on a $30M pre—you just sold ~80% in one round. If you had priced first and used SAFEs in between, you might have sold ~30–40% collectively. Founders get squeezed: new investors need ownership and want founders to retain meaningful stakes; structuring becomes near impossible.

Jason Kirby: I went through this with a company—stacked convertible notes. Notes usually have maturity dates and must convert—that's why founders like SAFEs without deadlines. But the lack of accountability and governance can cripple companies. You pitch your heart out, get everyone on your ship, but maybe the destination isn't that good. Without governance—no board, no maturity date—founders can hide reality. I invested in a company where that's exactly why it failed. With the luxury of raising a priced round sooner with good terms, it’s advantageous.

Ari Newman: The message: pay now or pay later. If you avoid the ~$20–30K lawyers charge for a proper priced round—opinion letter, option pool, etc.—you'll pay double or triple later. If a pre‑seed/seed company has a couple of angels comfortable with a price, the company is better off using ~3% of the $1M raised to price the seed. Then, if you raise another $1M in SAFEs, the conversion cap is informed by the prior round. Pricing forces governance: board of directors, option pool, 409A, 83(b) elections—real hygiene. Investors who help with formation are more invested than those wiring into a one‑pager SAFE.

Ari Newman: Another benefit: if the outcome isn't amazing and there's acquisition interest, a reasonably priced company lets a buyer know what it takes to satisfy the cap table. If you raised $5M and self‑set a $20–30M cap, small buyers and acqui‑hires won't happen—it's too expensive. You may end up with an asset purchase that rarely works economically.

Jason Kirby: Not good.

Ari Newman: Back in my last company, SAFEs didn't exist—we used notes. But I raised the first tranche priced. We raised ~$500K priced in 2007. Later raises referenced the last post; no need to reprice. When I joined Techstars as an investor, I analyzed many cap tables and built a calculator to identify the buying power of notes. That's when I saw 2–10× buying power and forced conversion events when companies weren’t ready—plus an admin nightmare of tracking dates, interest, etc. SAFEs are a good evolution—but they need to be used thoughtfully.

Jason Kirby: It's a tool in the toolbox. The advice is: be wary of excessive stacking and cap bumping; it confuses employees too. 409A vs. priced rounds—common vs. preferred—gets complex. Without an option pool you can’t grant equity properly. A 409A is the IRS‑accepted way to value common shares and is usually far from the SAFE cap people tout.

Ari Newman: Exactly—and that's important. Early‑stage valuation isn't what the business is “worth”; it's a function of deal dynamics and venture math. You earn your valuation through execution. If you keep raising SAFEs without creating an option pool or setting a 409A until Series A, employees wind up with higher strike prices than if you’d priced early and set a lower par value. More options issued later can also create worse tax outcomes. In service of all shareholders—including employees—be smart.

Jason Kirby: Pricing early is better for employees, future rounds, and clarity in exits—home runs or base hits. It's cleaner to know outcomes. Let’s talk about your perspective from boards—you’ve been on many and invested in many companies. Walk us from founder to investor (Techstars days) and how that shaped your view.

Ari Newman: Short version: I sold Filtrbox to Jive, spent two years there, and we took Jive public. After my lockup expired, I wanted something new—leaning into investing. I’d done some haphazard angel checks that didn’t work out, but I loved learning about other businesses and working with founders. I went back to Techstars and David Cohen to help; became Techstars’ first Network Catalyst, helped with a $25M vehicle (Bullet Time 2), then raised a bigger pool—my evolution from founder to investor. I’m addicted to ideas and zero‑to‑one; supporting smart people and placing bets on big ideas is rewarding.

Jason Kirby: Favorite investment—not necessarily biggest?

Ari Newman: From the Techstars era, a favorite story is the seed in Chainalysis (blockchain security). I started playing with crypto in 2016, already aware of blockchain. The company came through an accelerator; we put a standard $100K check in. The investment‑committee conversation echoed what I’d heard for 20 years: “Is this even a thing?” I’d heard that with the internet and social media before. Chainalysis solved a real business problem—transparency—in a nascent industry. It became a multi‑billion‑dollar company; sometimes contrarian bets are the best.

Jason Kirby: You’ve been a founder raising capital and then a VC partner raising capital from LPs. How are these alike or opposite?

Ari Newman: If I only knew then what I know now… As a founder (I last raised in 2007–2008 through the GFC), what I lacked was a deep understanding of venture objectives and power‑law math. Three notes for founders: (1) You’re not entitled to a dollar just because you started a company. (2) Learn venture math: pooled capital, fund size, ownership, outliers make the fund. (3) You might have a perfectly good $100M outcome business, but if a partner can’t see an orders‑of‑magnitude path vs. their pipeline, they won’t invest. You’re selling a product; they’re selling a product.

Jason Kirby: And pitching LPs as a GP—presenting the story you’ll find those outliers and own enough?

Ari Newman: As a first‑time GP, like a first‑time founder, LPs bet on you. With a second fund, you sell your track record. The big challenge is differentiation—there are thousands of pre‑seed/seed funds; many startups look similar (“slap AI on SaaS”). If I ran a pre‑seed SaaS AI fund, I’d index the best; you must convince me you’re the best of your ilk. With larger pools, cycles are longer and relationships matter—a $10M LP might partner with you for a decade, unlike a $25K angel “lottery ticket.”

Jason Kirby: With LPs it’s guaranteed to be a decade‑long relationship, often longer.

Ari Newman: The parallel is anchor LPs vs. lead investors—long‑lens partners across multiple funds.

Jason Kirby: Helpful perspective—why I like having fund managers on. Now, boards. You’ve been on many. What makes founder–board relationships work (or not)?

Ari Newman: Two things: trust and communication. When founders genuinely want input and can take feedback, those relationships are fantastic. When founders view the board as a tax and don’t trust that investors have their best interests, it becomes difficult. I’m an operator at heart; when I see a landmine, I want to be direct and constructive. Where it goes sideways, founders treat the board as a burden.

Ari Newman: In my company, we raised a small seed and had a board from the start. Reporting, self‑accountability, and dialogue about what’s working and not was incredibly helpful. Right after closing our second tranche, our lead suggested venture debt—it bought us runway, which mattered when the GFC hit. Ultimately, our acquisition by Jive came because inbound offers triggered board thinking about strategic fits, leading to that introduction. Prepping for board meetings was work and nerve‑wracking, but the value materially affected the outcome.

Jason Kirby: I’ve had partnership‑oriented boards and adversarial ones. We even lost a huge acquisition due to delays from misalignment with a chairman pushing against the founders. Accountability is uncomfortable, but crucial; boards play an important role.

Ari Newman: Better to put cards on the table. If what you sold (“10–100×”) no longer matches reality, work together on outcomes: acquisition, capital return, or winding down—don’t prolong pain. Investors should support and do no harm as long as possible; step in when leadership becomes destructive or jeopardizes returning capital. Transparency and partnership are key.

Jason Kirby: Founders sometimes choose boards for money/terms over partner quality. VCs win access by being true partners. Before we close: Massive VC—why did you start it and what’s the focus?

Ari Newman: David Mandel and I started Massive in 2020. We asked what’s great about venture and what’s missing. We’re multi‑time founders; we wanted to work with people we trust—strict no‑assholes policy. We weren’t excited to be “just another seed fund.” Personally, I want to back world‑changing category leaders. We began with deal‑by‑deal SPVs, scaled from ~10 to ~60 investors in 2020–2021, built a membership model, and evolved into a hybrid platform: a committed capital vehicle (the Massive Index) plus deal‑by‑deal. We figured out how to let both investor types participate in the same vehicles and offer more flexibility than a passive LP seat.

Ari Newman: We write detailed 10–15 page diligence memos and share them pre‑close so investors can decide allocation size. We handle allocation “cat‑herding.” You can be fully passive via the index or pick and choose to build a bespoke portfolio leveraging our access and underwriting. We invest at seed‑plus, early A, and up through growth—not pre‑seed/seed—and give smaller checks access to B/C/late rounds they couldn’t enter alone.

Jason Kirby: Compelling and differentiated—especially avoiding the noisy pre‑seed stage. If a founder wants to reach you, how should they get your attention?

Ari Newman: Email me at ari@massive.vc. Put the podcast name in the subject so I have context. We invest seed‑plus, early A, and beyond in deep tech, enterprise, and climate (not pre‑seed/seed).

Jason Kirby: Founders, do your homework—keep it relevant and respectful. Ari, this was a great conversation. Hopefully it helps founders understand how SAFEs and boards can be used for good—or not—depending on approach. Thanks for joining.

Ari Newman: Great to be here. Thanks, Jason. Appreciate it.