The Simple Agreement for Future Equity was designed, deliberately, to give early investors no governance rights. Y Combinator's form is explicit on this point: Section 1(c) of the standard post-money SAFE states that the investor "is not entitled, as a holder of this instrument, to vote or receive dividends or be deemed the holder of Capital Stock for any purpose," and has no right to "give or withhold consent to any corporate action" until the SAFE converts to equity.
This is intentional. The SAFE was conceived as a clean instrument for early capital — uncomplicated by the board composition negotiations, protective provisions, and consent mechanics that belong in a priced equity round. Founders give up economics; governance gets deferred. That's the deal.
The problem is what happens alongside the SAFE.
The Side Letter as Governance Vehicle
Many investors — particularly institutional angels, family offices, and established seed funds — will not commit capital on a bare SAFE without additional assurances. They negotiate a side letter: a separately executed agreement that runs alongside the SAFE and binds the company to obligations the SAFE instrument itself deliberately excludes.
Three categories of side letter provisions are worth examining in detail, because each introduces a form of governance influence the SAFE was designed to prevent.
Information Rights
Standard side letters grant the investor rights to receive quarterly and annual financial statements, monthly management accounts at higher investment thresholds, cap table updates upon material changes, and notice of significant corporate events. These sound benign — and in many cases they are. But information rights create obligations that run continuously until the SAFE converts or the right expires by its terms. A company that fails to deliver required reports is in breach of contract, regardless of whether any harm flows from the omission.
More consequentially, information rights establish a relationship of ongoing disclosure between the company and a person who has no formal governance role. An investor receiving monthly financials is in a position to observe trends, flag concerns to other investors, and condition their ongoing goodwill on management decisions they cannot formally influence. This is informal governance — and it is often exercised.
Inspection Rights
Inspection rights give the investor the ability to examine books, records, and sometimes facilities at reasonable times. The legal significance here is structural: SAFE holders are not stockholders of record. Delaware General Corporation Law Section 220, which allows stockholders to inspect books and records upon showing a "proper purpose," does not apply to SAFE investors — they haven't received stock yet. The 2025 amendments to Section 220 narrowed the statute further, making this gap even more pronounced.
A side letter inspection right fills that gap contractually. It transforms the investor from someone with no legal access to company records into someone with broad contractual access. That right can be exercised before a priced round, during a disputed transaction, or in advance of litigation — and the company cannot easily refuse it without breaching the side letter.
Negative Covenants
Negative covenants are the most consequential side letter provision. These are contractual restrictions requiring company consent — typically the investor's consent — before the company takes specified actions. Common examples include:
- Incurring indebtedness above a defined threshold
- Issuing new equity securities (beyond standard option plans)
- Selling or licensing material assets
- Entering into a change of control transaction
- Amending charter or organizational documents
- Materially changing the nature of the business
A negative covenant requiring investor consent before a sale of the company is, economically, a veto right. It is not labeled as one. It does not appear in the SAFE. It is not part of the cap table or the corporate governance documents. But it is legally binding, and it constrains what the founders can do without that investor's agreement.
Fragmentation: When Side Letters Stack
The governance problem compounds when a company closes multiple SAFE rounds with multiple investors, each of whom negotiates a separate side letter. Investor A has quarterly financials and inspection rights. Investor B has monthly financials, an MFN clause, and a veto on acquisitions above $50 million. Investor C has a pro-rata right and a negative covenant on new equity issuances. Investor D has inspection rights and a requirement that the company maintain a minimum cash balance.
None of these investors controls the company. None has a board seat. None appears in the corporate governance documents. But collectively, they have created a web of bilateral contractual obligations that fragments what the founders thought was unencumbered discretion. This is what practitioners have begun calling stealth governance fragmentation: the accumulation of informal governance influence through side letters that do not appear on the face of the SAFE instrument and are not visible in a standard cap table review.
Elisabeth de Fontenay and Yaron Nili's empirical study, Side Letter Governance (100 Wash. U. L. Rev. 907, 2023), documents that side letters have grown "substantially in both length and complexity over time" and impose "significant costs and delay on capital-raising." The authors attribute the proliferation partly to lawyer agency costs: counsel has "little economic incentive to coordinate and to reduce their billings" by standardizing language — leaving each investor's counsel to negotiate bespoke terms, and leaving companies holding a growing stack of inconsistent obligations.
The practical consequences emerge at several pressure points.
MFN cascade. An investor with an MFN clause is entitled to the benefit of any more favorable terms the company grants to a later investor. If the company grants a subsequent SAFE investor a lower valuation cap — for example, because circumstances have changed — the MFN investor can elect to convert on those terms. Companies often lose track of these provisions, particularly as the SAFE stack grows. The breach is silent until the MFN investor raises it.
Series A friction. When a lead investor arrives for a priced round and conducts due diligence, they will find the side letter stack. Standard practice is to require harmonization or termination of all prior side letter commitments as a closing condition. SAFE investors who resist waiving their rights can delay or complicate a closing that the founders consider critical. The investor with a veto on equity issuances has, in effect, leverage at a moment when the founders are most vulnerable.
Unknown breach. Companies routinely breach side letter obligations inadvertently. A company that issues new equity in a routine option grant without checking whether any side letter requires investor consent may be in breach without knowing it. That breach becomes a liability that surfaces during due diligence in a later transaction — often at a time when it cannot be easily remedied without the breaching party agreeing to a waiver.
What the Cases Show
The most direct reported case on SAFE side letter enforcement. Seed River held a SAFE in AON3D, a Delaware 3D printing startup, alongside a side letter that required AON3D to provide quarterly and annual financial statements and to permit account inspection. The company provided nothing and blocked access. Seed River sued in the District of Delaware (No. 21-1497).
The court found a breach of contract but denied injunctive relief because the side letter contained no express equitable remedy provision. Seed River was left to pursue damages — a slower and less satisfying remedy than the access it sought. The case establishes that side letter information and inspection rights are enforceable contracts, but it also illustrates the enforcement problem: an investor who wants access to records before a triggering event must litigate to get it, and may not obtain interim relief without the right drafting.
Investors held SAFEs in Wanderset Inc. that entitled them to convert on a "change of control." Wanderset merged with FaZe Clan but structured the transaction as an asset transfer rather than a formal statutory merger — apparently to avoid triggering conversion rights. Judge Kenneth Salinger of the Business Litigation Session held that the plain SAFE language only required conversion on a formal merger, not a de facto one, and dismissed the conversion claim. But he allowed the investors' implied covenant of good faith claim to proceed, finding that deliberately engineering a transaction structure to deprive investors of contractual rights was potentially actionable.
The significance: courts will look past technical compliance when a founder structures a transaction specifically to defeat investor rights. The implied covenant creates a floor. But the investors in Crashfund had to litigate to enforce it — and the outcome was a claim that proceeded, not a conversion that happened.
Bolt Financial's 2024 attempt to close a $450 million Series F at a structurally coercive valuation — one that would have crammed down all existing preferred stockholders — was halted by a temporary restraining order issued by the Delaware Court of Chancery (No. 2024-0918). BlackRock and Hedosophia, existing investors with contractual consent rights over material equity issuances, sued to block the round. The court issued the TRO within the timeframe requested, finding the investors had sufficiently demonstrated likely harm and likely success on the merits of their consent rights claim.
Bolt is not a SAFE case — it involves preferred stockholder protective provisions rather than side letters. But it is the clearest demonstration in recent years that investors who hold contractual consent rights can obtain emergency injunctive relief in the Delaware Court of Chancery when those rights are threatened. The lesson transfers directly to well-drafted negative covenants in SAFE side letters.
Over 60 investors committed approximately $1.8 billion to FTX's 2021-2022 fundraising, including Sequoia ($214 million), SoftBank, Tiger Global, and Temasek. None of them obtained meaningful governance rights. When Sequoia and others requested board seats, Sam Bankman-Fried declined, telling investors their ownership was too small to warrant one. Multiple institutions accepted this and invested without contractual information rights, board representation, or audit requirements.
FTX's board consisted of three people, including Bankman-Fried himself. There was no audit committee, no internal audit function, no board meetings, and financial statements prepared by a small firm in the Bahamas. When the company collapsed, John Ray III — appointed as new CEO in bankruptcy — stated: "Never in my career have I seen such a complete failure of corporate control and such a complete absence of trustworthy financial information." FTX is the paradigmatic case for the cost of waiving information rights at scale. The investors who lost hundreds of millions had no contractual mechanism to detect what was happening. A side letter with basic information rights would not have prevented the fraud — but it would have created the legal scaffolding to detect it earlier and potentially to act.
The Drafting Problem
The fragmentation problem is partly a drafting problem. Side letters negotiated separately, without reference to each other, produce obligations that conflict or overlap. An MFN clause that requires the most favorable terms across all future SAFEs interacts unpredictably with pro-rata rights granted to a later investor. A negative covenant on equity issuances conflicts with the company's obligation to reserve shares for an employee option pool. These are not hypothetical complications — they are regular features of SAFE stacks that have accumulated over multiple rounds.
The solution is not to refuse side letters. Information rights and inspection rights serve legitimate investor interests, and a sophisticated investor is right to want them. The solution is to treat the side letter stack as a governance document that requires active management: drafting each side letter with knowledge of the others, including clear termination provisions, and conducting periodic audits of outstanding obligations as the cap table evolves.
For founders, the more important practice is to understand what each side letter commits the company to before signing it. A negative covenant requiring consent for equity issuances above a threshold is not a standard administrative provision — it is a veto right. It should be evaluated as one.
The SAFE was designed to defer governance complexity. Side letters import it back in. The resulting structure is not the clean instrument the parties thought they were signing — it is a layered set of obligations that constrains both the company and its investors in ways that neither fully anticipated.
This article is for informational purposes only and does not constitute legal advice. Reading this content does not create an attorney-client relationship. Laws and regulations change; readers should not rely on this content as a substitute for qualified legal counsel specific to their circumstances. Attorney Advertising.