From SAFE to FAIR: Founder Aligned Investment Rights for the AI Era
Why we need new funding structures that align with how founders want to build
The venture capital model isn't just breaking down—it's actively misaligned with how the best founders want to build companies. For decades, the playbook worked: startups raised increasingly large rounds, scaled rapidly, and aimed for massive exits. But something fundamental has shifted. We're entering an era where the most successful companies might be the ones that don't follow this playbook.
Enter FAIR: Founder Aligned Investment Rights that let entrepreneurs optimize for profitability without exit pressure.
The Great Decoupling
Artificial intelligence is creating a new category of startups that can achieve remarkable outcomes with dramatically less capital. A single developer can now build products that would have required entire teams just five years ago. AI-powered automation handles everything from customer service to content creation to code generation. The result? Companies that can reach profitability faster, with smaller teams, and without the traditional venture scaling requirements.
Yet our investment structures haven't evolved to match this new reality. We're still using SAFEs and convertible notes designed for capital-intensive businesses that need multiple funding rounds before reaching profitability. This creates a fundamental misalignment: founders who could build sustainable, profitable businesses are pushed toward artificial growth and unnecessary exits because their investors need liquidity events.
The problem isn't just economic—it's psychological. Current structures force founders to optimize for the wrong metrics, hire beyond optimal efficiency, and pursue exits that might destroy long-term value. Everyone loses.
The Alignment Problem
Consider Emma, who raises $500K on a SAFE, builds an AI-powered legal research tool, and reaches $2M ARR with 80% margins within 18 months. In the traditional model, investors are now looking for the next round, the growth trajectory, the path to a $100M+ exit. But what if the optimal strategy is different? What if Emma could continue growing organically, maintain those incredible margins, and build a $10M+ annual profit machine?
Under current structures, this creates tension. Investors have no way to realize returns except through dilutive future rounds or a liquidity event. Emma faces pressure to scale beyond optimal efficiency, hire unnecessarily, or pursue exits that might not maximize long-term value.
The misalignment is structural, not personal. Good investors want founders to succeed, but SAFEs only provide one path to returns: conversion in an equity round or liquidity event. There's no mechanism for investors to benefit from sustainable profitability.
Introducing FAIR: Founder Aligned Investment Rights
FAIR documents represent a new approach designed specifically for this AI-enabled era of lean, profitable startups. The core insight is simple: create a structure that allows both founders and investors to benefit from sustainable profitability, not just exits.
Here's how founder alignment works in practice:
Dual-Track Returns: Investors receive their original investment back plus a preferred multiple (typically 2-3x) through either traditional exits or profit distributions. Once this preference is satisfied, they automatically convert to common stock or exit profit-sharing arrangements entirely.
Profit Participation: While the preference remains unsatisfied, investors receive a percentage of distributable profits (typically 20-40%). This creates immediate returns from successful, profitable operations rather than waiting years for liquidity events.
Founder Control: Unlike traditional preferred structures, founders maintain operational control throughout. Investors have limited protective provisions focused only on decisions that materially affect profitability or the ability to service the preference.
Exit Flexibility: If a traditional exit opportunity arises, the structure seamlessly handles both scenarios. Preference holders are protected, but there's no artificial pressure to pursue exits when organic growth is superior.
Conversion Certainty: Once investors have received their preference through any combination of profits and exits, they automatically convert to common stock. No ongoing preferred rights, no complex cap table management, no misaligned incentives.
A Concrete Example: How Alignment Could Work
Imagine Sarah raises $300K using FAIR documents to build an AI-powered financial planning tool. The terms include:
3x liquidation preference ($900K total)
25% profit participation until preference satisfied
Automatic conversion to common stock once preference paid
Founder retains full operational control throughout
Year 1: Sarah reaches $50K monthly profit. Investors receive $150K annually (25% of $600K annual profit). Remaining preference: $750K.
Year 2: Profits grow to $150K monthly. Investors receive $450K annually (25% of $1.8M). Remaining preference: $300K.
Year 3: Profits hit $200K monthly. Investors receive $300K in the first 1.5 months to satisfy remaining preference, then automatically convert to common stock.
Result: Investors got their 3x return in under 3 years plus ongoing upside as common shareholders. Sarah built a $2.4M annual profit business, maintained complete control, and never faced pressure to exit or scale artificially.
Both parties won because their incentives were aligned from day one.
Building on SAFE: Key Adaptations for FAIR
FAIR documents can leverage the proven SAFE framework while introducing profit-sharing mechanics:
Conversion Triggers: Like SAFEs, FAIR converts in equity financings, liquidity events, or dissolution events. But FAIR adds a fourth path: profit distribution mode when the company achieves sustained profitability.
Post-Money Clarity: Following SAFE's post-money structure, FAIR provides immediate ownership transparency. Investors know exactly what percentage they own and what profit share that represents.
Liquidation Priority: FAIR maintains SAFE's liquidation waterfall (junior to debt, senior to common) but adds profit distribution rights that activate before traditional liquidity events.
Conversion Mechanics: When preference is satisfied through profits, FAIR automatically converts to common stock, eliminating the complexity of managing preferred rights indefinitely.
The Ripple Effects of Founder Alignment
If FAIR documents gain adoption, they could catalyze broader changes:
Founder Behavior: More entrepreneurs will optimize for profitability over growth, leading to more sustainable businesses and better unit economics from day one. Founders can focus on building great products instead of managing investor expectations around artificial milestones.
Investor Strategy: Angels will need to develop new expertise in evaluating profitable business models rather than just scalable ones. Due diligence will focus more on margins, customer retention, and sustainable competitive advantages than just growth metrics.
Market Dynamics: We might see the emergence of "profit unicorns" - companies generating $10M+ annual profits without ever raising large rounds or pursuing exits. These businesses could become the backbone of a more sustainable startup ecosystem.
Innovation Patterns: With less pressure for massive outcomes, founders can take more creative risks and build solutions for underserved markets that might not support billion-dollar exits but can sustain highly profitable businesses.
Talent Allocation: The best founders might choose to build smaller, more profitable companies rather than managing large, capital-intensive operations. This could lead to more innovation and competition across markets.
Implementation Challenges
FAIR documents aren't without complexity. Key challenges include:
Tax Treatment: Profit distributions may complicate tax situations for both founders and investors. Clear accounting standards and tax guidance will be essential. The structure may require specific elections or entity choices to optimize tax treatment.
Definition Disputes: "Distributable profits" must be defined precisely to avoid conflicts. The framework needs clear rules about reinvestment, working capital reserves, founder salary caps, and distribution timing.
Investor Education: Many angels are accustomed to binary exit outcomes and may need time to understand the profit-sharing model. The structure requires a shift in thinking about returns, liquidity, and portfolio construction.
Follow-on Compatibility: The structure must work seamlessly with potential future rounds while protecting the economics for both parties. Traditional VCs may need education on how FAIR holders convert and participate.
Accounting Complexity: Companies will need robust financial systems to calculate and distribute profits accurately. This may require more sophisticated bookkeeping than typical early-stage startups maintain.
The Path Forward
The venture capital model will always have its place for companies that truly need massive scale. But we need complementary structures for the growing category of AI-enabled businesses that can achieve remarkable outcomes with capital efficiency.
FAIR documents represent one approach to this challenge. The key is starting with simple, standardized templates that address the most common scenarios, then iterating based on real-world usage.
What we're really building is an alternative path for entrepreneurship—one where founders can optimize for the metrics that matter (profitability, sustainability, customer value) rather than the metrics that satisfy misaligned capital structures.
The future belongs to founders who can build profitably from the start, and investors who can recognize that the biggest returns might come from sustainable businesses rather than just scalable ones. FAIR documents are designed to make both possible.
When founders and investors are truly aligned, everyone wins. The company builds better products, serves customers more effectively, and creates more value for all stakeholders. That's what FAIR really means. Welcome to the era of Seedstrapping!
The author is developing FAIR document templates and building a community of aligned investors and founders. If you're interested in participating in the early development of these structures, get in touch!