The Case for Uncapped SAFEs

Mention uncapped notes to most LPs or GPs and you'll get an immediate visceral reaction. I understand why—it's hard to invest when you don't know the price, and the downside scenarios are obvious enough that I won't belabor them here.

But there are specific situations where uncapped notes are acceptable if not preferable.

The Instant Markup Play

The clearest case for uncapped structures is when a large priced round is already closing. By moving quickly, you can sometimes negotiate a SAFE with no cap and a discount (typically 10-25%), locking in an instant markup.

This has happened twice for me recently. In one case, a Series B term sheet had been signed and was closing. We knew the company and the people around the table well. We were pushing to move quickly and the company offered us and a few other eager insiders the chance to wire ahead of close on an uncapped SAFE with a 20% discount. Same situation with a Series E—we were long-time investors, they had a lead and a locked price, and they offered a few pushy existing backers an uncapped with a 20% discount to the round if they wired immediately.

If you know the business well and the price is already set, this is essentially free money in the form of an unrealized instant gain. You're not taking valuation risk typically —you're just getting paid for speed and trust. And founders will do this sometimes to reward fast insiders, but other times because they need a bit more cash runway as cushion in case the closing process of their priced equity round takes longer than expected. 

The hard part is getting syndicate LPs to buy into the story. "Uncapped" triggers an allergic reaction for many. But if you've built trust with your base—especially if you have prior investments in the company—it's a story you can tell. It just requires LPs willing to look past the label and understand the mechanics of why this may actually be a good deal.

The Access Play

The second scenario is more controversial: taking an uncapped structure with a discount to secure access to a top-tier company when you know you'll likely be shut out of the next priced round.

Maybe the round will be too competitive. Maybe you won't meet the minimum check size. Maybe the company is overcapitalized and you're not a priority allocation. Whatever the reason, an uncapped structure with a modest discount can be your only way in.

This has worked both well and poorly for me. We previously did an uncapped note into a really high-performing seed-stage company with a 10% discount to the Series A. We were confident we wouldn’t get an allocation in the Series A, and we were right. But the Series A was priced at $500 million, which was far beyond anything we'd underwritten. 

As a syndicate GP, I'd do this deal again. We got into a high-performing business at the only entry point available, with a discount to Series A investors. As an early stage fund manager, I don’t think I would have.

Why This Works Differently for Syndicates vs. Funds

Here's where the model matters.

Say you write a $10 million check on an uncapped note with a 10% discount, expecting to convert at a $100 million Series A. You're underwriting for roughly 11% ownership. But the Series A comes in at $500 million. Now your $10 million converts at $450 million (after the discount), giving you just 2.2% ownership. Your discount helped, but you're now holding a position that needs a $4.5 billion exit to return 10x pre-dilution—the same exit that would have returned 50x at your original underwrite.

For a fund manager, this is a problem. Funds have ownership targets and portfolio math that needs to work. A position that was supposed to be meaningful is now a rounding error. You've deployed $10 million into a "winner" that can't actually move the needle on fund returns.

Syndicates operate differently. Each deal stands on its own. There are no ownership targets, no fund-level math, no mandate to satisfy. If an uncapped note or SAFE converts at a nosebleed valuation, it hurts that specific investment—but it doesn't pollute a pooled vehicle.

This doesn't make uncapped structures risk-free for syndicates. Compressed upside still stings. But the damage is contained in a way it isn't for funds.

The Bottom Line

Uncapped notes aren't for every deal or every investor. But in the right circumstances—a locked price with a meaningful discount, or a high-conviction company you'd otherwise miss entirely—they can still be an opportunity. The key is understanding why you're doing it and whether your model can absorb the downside if things don't break your way.

Disclaimer: The information provided in this newsletter is for informational and educational purposes only and does not constitute financial, investment, or legal advice. The discussion of potential IPO candidates, valuations, and market conditions reflects publicly available information and should not be interpreted as a recommendation to buy, sell, or hold any securities. Past performance is not indicative of future results, and investing in IPOs and private companies involves significant risk, including the potential loss of principal. Readers should consult with a qualified financial advisor before making any investment decisions.

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✍️ Written by Zachary and Alex