Founders, Beware the Hidden Pitfalls of Rolling ASAs, SAFEs, and SeedFASTs
These tools can come with hidden traps that, if not carefully managed, can significantly dilute your equity and disrupt your cap table.
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Raising funds as a founder can be a high-pressure journey, and instruments like Advance Subscription Agreements (ASAs), Simple Agreements for Future Equity (SAFEs), and SeedFASTs are often appealing for their speed and simplicity. However, these tools can come with hidden traps that, if not carefully managed, can significantly dilute your equity and disrupt your cap table.

One critical area of concern is the long-stop conversion terms. Poorly defined or misaligned long-stop provisions can create a cascade of unintended consequences, including severe dilution and negative market signals that hinder your company’s fundraising prospects.

Understanding the Danger of Rolling Conversion Terms

Many founders turn to these instruments with good intentions but overlook how staggered conversions can lead to compounding problems. Consider this common clause in a SeedFAST:

"To protect your investment, in the event that there is no new funding round in the next 6 months, then after the 6 month period (or if the company is liquidated, dissolved, wound up, goes into administration or enters into a scheme of arrangement, prior to such an event) your investment will convert into shares at a valuation of £X million."

At first glance, this provision seems fair—it sets a safeguard for investors. But if you issue multiple rolling ASAs, SAFEs, or SeedFASTs over time, this clause can have unintended consequences:

Rolling Long-Stop Dates

When these instruments are issued on a rolling basis without a unified, fixed long-stop date, conversions occur at different times and valuations. Early investors convert at one valuation, while later investors convert at the same valuation, but after the share capital has been diluted by earlier conversions.

Compounding Dilution

Each conversion effectively becomes its own "round," adding new shares to the cap table and diluting the equity of both the founders and the earlier investors. This dilution snowballs over time, leaving founders with far less ownership than expected and potentially straining relationships with your earliest backers.

Perceived Down-Rounds

Every successive conversion at the same valuation, especially if it follows a period of stagnation, can signal a lack of growth to the market. This perceived "down-round" effect can undermine investor confidence and make future fundraising more challenging.

How to Avoid These Pitfalls

The good news is that these issues are avoidable with proactive legal planning. Here’s how to safeguard your equity and set your company up for success:

Fix the Long-Stop Date

Instead of tying the long-stop provision to a rolling 6-month period for each agreement, set a unified, hard date—for example, 6 months from the issuance of the first ASA, SAFE, or SeedFAST in the round. This ensures all conversions happen simultaneously and at the same valuation, maintaining consistency and compliance with SEIS/EIS rules.

Unify Terms

Ensure all agreements under a single fundraising round use consistent terms. This prevents discrepancies between investors and avoids misaligned incentives that could cause friction.

Seek Expert Legal Advice

The nuances of these agreements can have significant long-term implications for your cap table and equity distribution. Engaging an experienced lawyer to draft, review, and align these documents ensures that the terms protect your interests and support your company’s growth.

Why This Matters

Your cap table is more than just numbers on a spreadsheet—it represents the motivation, reward, and control you have as a founder. Poorly managed rolling instruments can erode your ownership and damage investor relationships, making it harder to achieve your long-term goals.

Even if you’ve already issued rolling ASAs, SAFEs, or SeedFASTs, it’s not too late to address these challenges. With the right advice and a proactive approach, you can correct course, renegotiate terms with your investors, and protect your equity.

Partner with Avery Law

At Avery Law, we specialise in helping founders navigate the complexities of fundraising while safeguarding their equity and cap table. From drafting and reviewing ASAs, SAFEs, and SeedFASTs to ensuring SEIS/EIS compliance, our team provides the tailored advice you need to succeed.