MFN and pro rata side letters
YC's three post-money SAFEs — cap only, discount only, uncapped MFN — and the pro rata side letter that rides beside them.
YC publishes the post-money SAFE three ways: with a valuation cap and no discount, with a discount and no cap, and as an uncapped MFN SAFE with neither. The MFN SAFE has no terms of its own to convert on; it inherits them.
A pro rata right is different: the right to buy into a later round to keep a percentage. The post-money SAFE moved it out of the SAFE and into a separate, optional side letter, which applies to the round the SAFE converts in.
Cap only
- Good at
- Ownership = investment ÷ cap
- Easy to stack and to explain
- Watch for
- Sets an anchor for the next round's valuation
- A low cap is expensive if the company grows fast
- Best for
- Most rounds: the dilution is known the day it's signed
Discount only
- Good at
- No valuation negotiated now
- Investor still gets a better price than the round
- Watch for
- Dilution unknown until the round prices
- A high round price means many shares
- Best for
- When nobody can agree on a number yet
MFN, uncapped
- Good at
- Closes fast with no terms to negotiate
- The investor is never worse off than later SAFEs
- Watch for
- Can't model the dilution until a later SAFE sets terms
- Every later SAFE's terms flow back to it
- Best for
- Very early money from people who trust later terms
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- Background reading — not an authority
- Y Combinator, SAFE financing documents — MFN (opens in a new tab)The uncapped MFN SAFEFree to read
- Y Combinator, SAFE financing documents — Pro Rata Side Letter (opens in a new tab)The pro rata side letterFree to read
- Y Combinator, SAFE financing documents (opens in a new tab)The post-money SAFE: cap only, discount only, or MFNFree to read
The words this page teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Most favored nation clauseA promise that an investor's terms improve to match better terms the company gives a later investor. YC's MFN SAFE has no cap or discount and takes those of any SAFE issued later
- Pro rata rightAn investor's right to buy its proportionate share of a later round, so it can keep its percentage. In the NVCA model it belongs to Major Investors; on a post-money SAFE it lives in an optional side letter
- Valuation capThe highest valuation a SAFE or note converts at. On YC's post-money SAFE the Safe Price is the cap ÷ Company Capitalization, and the holder takes whichever of that or the round price issues more shares
- Conversion discountA SAFE's or note's right to convert at a percentage below the round price — 20% off a $1.00 round is $0.80 — whichever of the discount price or the cap price is lower wins