# 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.

Source: https://lopifi.com/learn/ways-to-raise-startup-capital/safe/mfn-and-pro-rata-side-letters
Part of: Lopifi — US GAAP books on autopilot, checked by a CPA (https://lopifi.com)

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**What is an MFN SAFE, and what is a pro rata side letter?** 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](https://lopifi.com/md/glossary/valuation-cap) and no discount, with a [discount](https://lopifi.com/md/glossary/conversion-discount) and no cap, and as an uncapped [MFN](https://lopifi.com/md/glossary/most-favored-nation-clause) SAFE with neither. The MFN SAFE has no terms of its own to convert on; it inherits them.

> “it automatically takes the valuation cap or discount of any SAFE you issue later.”

— [Y Combinator, SAFE financing documents — MFN](https://www.ycombinator.com/documents), The uncapped MFN SAFE

A [pro rata right](https://lopifi.com/md/glossary/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.

> “The pro rata right lives in an optional, standardized side letter rather than in the SAFE itself.”

— [Y Combinator, SAFE financing documents — Pro Rata Side Letter](https://www.ycombinator.com/documents), The pro rata side letter

**Northwind — A pro rata letter at the Seed.** If the SAFE investor had a pro rata side letter, it could buy into the October 1, 2027 Seed alongside the new money. That shares come out of the Seed's allocation is the side letter's real cost: a lead investor who wants 20.00% has to make room for it, or the round grows.

**Cap only**
- Pro: Ownership = investment ÷ cap
- Pro: Easy to stack and to explain
- Con: Sets an anchor for the next round's valuation
- Con: 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**
- Pro: No valuation negotiated now
- Pro: Investor still gets a better price than the round
- Con: Dilution unknown until the round prices
- Con: A high round price means many shares
- Best for: When nobody can agree on a number yet

**MFN, uncapped**
- Pro: Closes fast with no terms to negotiate
- Pro: The investor is never worse off than later SAFEs
- Con: Can't model the dilution until a later SAFE sets terms
- Con: Every later SAFE's terms flow back to it
- Best for: Very early money from people who trust later terms

Which SAFE to sign, from the founder's side

## Where this page's rules come from

- [Y Combinator, SAFE financing documents — MFN](https://www.ycombinator.com/documents) — The uncapped MFN SAFE (reference)
- [Y Combinator, SAFE financing documents — Pro Rata Side Letter](https://www.ycombinator.com/documents) — The pro rata side letter (reference)
- [Y Combinator, SAFE financing documents](https://www.ycombinator.com/documents) — The post-money SAFE: cap only, discount only, or MFN (reference)

## Read further

- https://lopifi.com/md/accounting/safe

- **Track:** [Cap tables & raising](https://lopifi.com/md/learn/equity)
- **Part of:** [Ways to raise: SAFEs, notes, priced rounds, debt and grants](https://lopifi.com/md/learn/ways-to-raise-startup-capital) › [The SAFE](https://lopifi.com/md/learn/ways-to-raise-startup-capital/safe) — 5 min
- **Terms taught:** [Most favored nation clause](https://lopifi.com/md/glossary/most-favored-nation-clause), [Pro rata right](https://lopifi.com/md/glossary/pro-rata-right), [Valuation cap](https://lopifi.com/md/glossary/valuation-cap), [Conversion discount](https://lopifi.com/md/glossary/conversion-discount)
- **Previous:** [Post-money SAFE math](https://lopifi.com/md/learn/ways-to-raise-startup-capital/safe/post-money-safe-math)
- **Next:** [The convertible note](https://lopifi.com/md/learn/ways-to-raise-startup-capital/convertible-note)
- **The course:** https://lopifi.com/md/learn