The Most Dangerous Words in Venture Capital

Each month, my managing partner and I convene for a ritual most investors know well: the investment committee. It’s where we decide which companies to back—and which to pass on. With an investment clip of ten deals per year, our pace is purposeful. The conversation usually flows, smoothly—that is, until I dam it with a single phrase: “We invested on an uncapped SAFE.”

When you accept an uncapped SAFE, you’re not so much receiving an investment as you are being offered a euphemism for free money—an undefined ownership whose value hinges on future valuations. Historically, these notes were used in rare, high-momentum scenarios, serving as short-term bridge financing for founders who had already proven their vision, because at the pre-seed stage, investing is an act of faith—a decade-long covenant where each party shoulders risk together, not just a blind bet on future valuations.

Yet today, these once-exceptional terms are increasingly common, driven by mega-funds eager to deploy capital on their own terms, effectively undoing the balance that ensures both founder and investor walk the same path at the same pace.

At first glance, an uncapped SAFE can appear like a founder’s ultimate privilege: no formal valuation, minimal dilution (for now), and a quick close. Mega-funds—investment firms with billions of dollars of assets under management—celebrate uncapped SAFEs as proof that you’re so “promising,” you don’t even need a valuation. Since ChatGPT’s launch and the proliferation of AI startups that followed, I’ve seen what seemed like a blessing sow seed of deeper misalignment, driving a wedge between founders and investors and gradually reducing a decade-long partnership to a financial transaction.

This essay explores the deeper imbalance beneath the label of “free money,” revealing how an uncapped note can erode your control, your equity, and the collaborative spirit that makes pre-seed investing a mutually beneficial shared journey between founder and first-check investor. I write as someone whose livelihood and returns hinge on the success of the earliest bets I place; When I take on risk, I insist on defined ownership that ties me to your outcome. Before metrics or milestones, it’s our mutual promise—to bear the burden and share the reward—that matters.

When that promise corrodes—when the investor no longer feels the pain if you falter—no influx of capital can compensate for a partner who isn't dedicated to guiding you through the inevitable fits and starts of reaching the milestones requisite for your next round.

My goal in this essay is twofold: first, to highlight the hidden costs that accompany an uncapped SAFE, and second, to explain why these instruments keep appearing at the first stage of company-building—even though they threaten the very alignment founders need most.

Caught In The Misaligned Incentives

In pre-seed investing, you and your earliest investor should sit on the same side of the table, sharing both the risks and rewards of early building.

When mega-funds push uncapped SAFEs, however, that shared journey—that unwavering commitment—begins to fracture before it even takes root.

While they seem like the “best deal” a founder can get—free money, no immediate dilution—an uncapped note leaves the issuing fund with virtually no skin in the game. The pre-seed check is just 0.1% of their multi-billion-dollar fund, merely a rounding error in a portfolio of dozens.

Presented as validation of your idea, these instruments in fact reduce your life’s work to a call option—a detached financial tool. They grant mega-funds lopsided leverage: the right, but not the obligation, to own more of your company when things go well, and to walk away when things do not. The burden of risk—the weight of your vision—slides back onto your shoulders, and yours alone.

This misalignment often plays out in three ways:

1. Base-Case (Common): You make progress, but not at the exponential rate the mega-fund expects. Their 0.1% stake, now a distraction rather than a potential home run, doesn’t warrant further capital. They decline to participate in the next round, leaving you to explain the sudden absence of your once-enthusiastic partner to future investors.

2. Worst-Case (Frequent): Inevitable hiccups appear—the market shifts, a competitor out executes–and you need your investor’s support more than ever. The mega-fund, with its negligible stake, offers little beyond perfunctory advice; the fund are already eyeing the next big deployment. That “free” money becomes an anchor around your neck.

3. Preemption Trap (Rare): On occasion, a mega-fund preempts your next round, rushing in more capital before you can conduct a thorough fundraising process—one that typically involves multiple term sheets, transparent valuations, and genuine leverage in negotiations. On the surface, it seems like validation—until you realize you’ve forfeited the chance to secure better terms with other investors. With your options curtailed, the mega-fund seizes control of the relationship, shaping it to their timeline, often at your expense.

These scenarios unmask the truth behind uncapped SAFEs: an investor’s undefined ownership creates a perverse incentive. The harder your struggle—the more milestones missed, the more the market doubts your vision—the lower your valuation, and thus the bigger the fund's slice of your company. Your hardship becomes their windfall.

Perverse incentives are not exclusive to mega-funds issuing these uncapped notes. Even as a pre-seed investor, I am not immune when cornered into an uncapped note. If my ownership isn’t defined and your valuation target is lower, I stand to gain proportionally more equity.

That’s why I advocate for defined valuations. When our stakes are clear on day one, I'm fully incentivized to help you boost your valuation tomorrow—because my success is tied to yours. Uncapped notes remove those guardrails, turning a decade-long partnership into a gamble with distorted incentives.

So, if you are weighing an uncapped offer, ask the lead investor the following:

• What are your criteria for a follow-on investment?

  • Do you have reserve capital allocated to companies showing “reasonable” (rather than exponential) progress?

  • Can you cite examples where you increased your stake from an uncapped note—or chose not to?

• How do you support founders through pivots or downturns?

  • Get specific examples of when they've rolled up their sleeves. If they can’t point to times they truly stepped in, the silence is in and of itself a telling answer.

• If you decide to preempt our next round, how does that benefit–or limit–us?

  • Is preempting a partnership move or an ownership move?

• How do you envision building your stake, and what’s your ideal ownership?

  • A precise strategy suggests they are serious about your long-term success.

The goal of these questions is to determine whether the investor is truly invested in your success or if they are simply optimizing market risk.

Are they betting on you, or playing to their deployment schedule?

When Too Much Meets Too Early

To understand why the early-stage covenant has broken down, we must step back and see what’s driving mega-funds to target the earliest rounds. Only with the full picture of today’s venture landscape can we grasp the bigger game—and your role within it.

As yields flatlined post-2008, Limited Partners (LPs)—the investors behind venture funds—sought higher returns in riskier arenas. Many found apparent safety in brand-name venture firms, relying on track records and the idea that success begets success.

That quest for security funneled unprecedented capital into venture’s largest funds, especially those managing over $500 million, as the data below illustrates.

Such capital concentration leaves us with a predictable outcome: too much money chasing too few genuinely promising deals. The scale of this deployment becomes evident when you examine the volume of capital these funds are mandated to allocate.

The next chart shows the formidable base mega-funds command—money that demands a home in startups, regardless of whether those startups truly need it.

To raise their next fund, these firms are incentivized to deploy—and do so quickly. What should be a deliberate, strategic process can devolve into just another box checked on their path to the next raise.

Emboldened by these imperatives, mega-funds go further: they manufacture deal flow, launch incubators and accelerators, and pursue uncapped notes—even where no round was planned.

Once anchored by patient capital and a collaborative ethos, the traditional venture model has, in many instances, shifted toward a display of financial might.

The dilemma for you becomes less about the size or terms of a deal and more about the invisible weight it carries: the promise of validation on one side and the heavy chains of future obligations—with the power to contort a company's trajectory in unforeseen ways—on the other.

And so, as mega-funds wield the deceptive allure of uncapped SAFEs, the instrument designed to protect your earliest steps risks becoming the very tool that undermines them.

The Pre-Seed Arithmetic

If these earliest rounds—the ones meant to unite founder and investor—devolve into a transaction, where is the partnership that once promised to transform a bold idea into a living, breathing company? If that unspoken promise, the willingness to weather risk together, gives way to optionality, then who remains to champion the founder whose only real capital is conviction?

An investor who shares neither the burden nor the consequences cannot claim to share the vision. An uncapped note, dressed up as freedom, can erode the tether that holds us close in the face of doubt and adversity. The intangible bond that elevates pre-seed beyond mere finance—that covenant—requires both literal and figurative ownership, or it collapses into a “maybe” that neither nurtures nor defends.

No matter the spreadsheets, no matter the pace of capital deployment, it’s that shared skin in the game that has always let founders and first-check partners do more than invest: it has let them believe.

Without that faith, pre-seed becomes yet another fleeting trade. And if we lose faith, if we sacrifice the intimate alignment that pre-seed was built upon, we lose the very soul of early venture: the intangible act of building the improbable, shoulder to shoulder, because we dared to keep each other tethered to the risk—and to the reward.

Special thanks to Eric Chen, Marcus Gomez, and Maneesh Apte for their helpful feedback on this piece.