Submit your startup on Round Funded to get matched with investors, and understand how a YC SAFE can affect ownership before you add another SAFE to your fundraising stack. YC’s structure combines a fixed-percentage SAFE with an uncapped SAFE that has an MFN clause.
What does the YC SAFE include?
Y Combinator’s investment is structured through two post-money Simple Agreements for Future Equity, or SAFEs. One SAFE is $125,000 for a fixed 7 percent. The other is $375,000, has no cap of its own, and includes a Most Favored Nation clause.
Neither SAFE issues shares when you sign it. Both convert at the first priced round. The fixed portion converts to 7 percent without a valuation cap or discount. The uncapped portion can take on the terms of a later SAFE if that SAFE offers more favorable terms and is signed before the priced round.
That distinction matters when you raise from other investors after your YC batch. The terms on the later SAFE may affect not only that investor’s ownership, but also the conversion terms for YC’s MFN SAFE.
YC introduced the SAFE in late 2013 in a pre-money form. In 2018, it changed the instrument to a post-money structure. With a post-money SAFE, you can assess the ownership represented by the SAFE when you sign, rather than treating the percentage as unknown until the next financing.
How does a YC SAFE set ownership?
A post-money SAFE with a valuation cap converts using the applicable term that gives the investor the lower purchase price. That can be the cap or a discount to the priced-round price.
For a simple cap calculation, divide the investment by the post-money cap. For example, $500,000 invested on a $5 million post-money cap represents 10 percent. This arithmetic gives you a way to estimate the SAFE’s ownership before the priced round.
The phrase “post-money” does not refer to the company’s value after the new priced-round investment is added. It describes the point after the SAFEs convert and before the new round’s capital buys in. At conversion, the SAFE percentage is set immediately before the priced round.
After that, the new investment and any option-pool refresh dilute the converted SAFE holders along with the founders. So a post-money SAFE makes the ownership calculation clearer, but it does not remove future dilution.
What can an MFN clause change?
MFN stands for Most Favored Nation. In this YC structure, the $375,000 SAFE starts without a cap or discount. If you later sign a SAFE with better terms before the priced round, the MFN clause can allow the YC SAFE to adopt those terms.
Consider a later angel SAFE for $300,000 at a $6 million post-money cap. If that cap becomes the applicable MFN term, YC’s $375,000 portion converts to 6.25 percent. The fixed YC SAFE remains 7 percent, giving YC 13.25 percent in total. The angel SAFE represents another 5 percent, for total SAFE ownership of about 18.25 percent before the Series A.
YC’s own worked example uses a $15 million post-money cap. Under those terms, the $375,000 MFN portion converts to about 2.5 percent. Combined with the fixed 7 percent SAFE, YC’s ownership is near 9.5 percent. Comparing the examples shows why the terms on a later SAFE deserve attention: a lower cap can change the conversion of an initially uncapped MFN SAFE.
How do later SAFEs affect founder dilution?
With post-money SAFEs, each SAFE’s ownership is measured separately. A later SAFE generally adds dilution for the founders rather than reducing the percentage already represented by an earlier SAFE. As the stack grows, the founders’ remaining ownership can therefore fall even when earlier SAFE holders keep their converted percentages.
The priced round brings another dilution event. Once the SAFEs convert, the new round’s investors and any option-pool refresh dilute founders and converted SAFE holders together. Keep those stages distinct when estimating ownership: first account for the SAFE stack, then consider the priced round and pool changes.
Discounts and pro rata rights also belong in your review of the terms. A discount is typically 10 to 20 percent off the priced-round price. Discounts are common on angel SAFEs and rare on YC’s own paper. A pro rata side letter gives an investor the right to invest more in the next round to maintain their percentage. YC receives one through the YC Agreement.
A useful planning approach is to model the full stack rather than consider each SAFE alone. The guidance in this example is to budget total post-YC SAFE dilution to 15 to 20 percent before the priced round, raise additional SAFEs in one batch rather than gradually, and maintain a conversion model based on a realistic Series A cap.
What should you check before signing another SAFE?
Before agreeing to another SAFE, record its amount, cap, discount, MFN status and pro rata terms. Then update your conversion model after each signature. Waiting until the priced round can make it harder to see how a new SAFE changes the overall ownership picture.
Review the effect on both sides of the transaction. Estimate the new investor’s conversion, then check whether the terms may also change conversion for an existing MFN SAFE. A new cap or discount can have implications beyond the document you are currently negotiating.
Set a dilution ceiling before adding more SAFEs and compare the complete stack against it. If the ceiling is reached, consider whether the next financing should be a priced round instead of another SAFE. The key is to evaluate the next check as part of the whole capitalization picture, not in isolation.
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Frequently Asked Questions
What is a YC SAFE?
It is Y Combinator’s post-money Simple Agreement for Future Equity. The investment described here consists of a $125,000 SAFE for a fixed 7 percent and a $375,000 uncapped SAFE with an MFN clause. Both convert at the first priced round.
How do you calculate ownership from a post-money cap?
For a simple cap calculation, divide the investment amount by the post-money cap. For instance, $500,000 on a $5 million cap represents 10 percent. The percentage is set before the priced-round money buys in.
Does an MFN clause give an uncapped SAFE a valuation cap?
It can. If you sign a later SAFE with more favorable terms before the priced round, the YC MFN SAFE may inherit those terms. The later SAFE’s cap can therefore affect conversion of the previously uncapped SAFE.
Do later SAFEs dilute earlier SAFE investors?
Generally, later SAFEs add dilution to founders rather than reducing an earlier SAFE holder’s percentage. At the priced round, the converted SAFE holders are diluted alongside founders by the new investment and any option-pool refresh.
What should founders track when adding a SAFE?
Track the amount, cap, discount, MFN status and pro rata terms. Update your conversion model after signing, and assess the new SAFE’s effect on the full stack, including any existing MFN SAFE.