The YC deal

“YC invests $500,000 for 7%.” You can read this sentence on many websites, and it is wrong. YC invests $500,000 through two separate SAFEs, and each SAFE has its own price. YC fixes one price on the day that it invests. Your next round sets the other price. This lesson shows how the two prices work, and what YC owns after your next round.

Two SAFEs, two prices

The YC deal page describes the YC standard deal in one sentence: “We invest $500,000, and our investment gives YC 7% of your company plus an incremental equity amount that will be fixed when you raise money from other investors.” The money goes in two parts:

• The $125K SAFE. “$125,000 on a post-money SAFE in return for 7% of your company.”
• The MFN SAFE. “$375,000 on an uncapped SAFE with a Most Favored Nation (‘MFN’) provision.”

The two parts are SAFEs. A SAFE gives the investor shares at the next priced round, not today. The lessons on what a SAFE is and post-money cap math tell the full story. Only one rule is necessary here. The ownership of a Post-money SAFE is its amount ÷ its post-money cap.

The fixed part: $125K for 7%

The $125K SAFE buys a fixed 7%. From the cash and the stake, you can calculate the price of the company that the deal implies. This price is an implied valuation:

Implied post-money = Cash ÷ Ownership
                   = $125,000 ÷ 0.07
                   = $1,785,714 (approximately $1.79M)

Implied pre-money  = $1,785,714 − $125,000
                   = $1,660,714

YC’s 7% is “7% of the company’s equity (including any existing option pool) after all the SAFEs and other convertible instruments have converted.” Thus YC measures the 7% at one moment: the moment when the SAFEs convert. The 7% comes out of the holders who own shares before the SAFEs, the founders and the option pool. Two founders with 50% each then own 46.5% each, before any other SAFE.

Work it out

Before YC, Ada owns 60% of Northwind and Ben owns 40%. After YC's fixed 7%, and before any other SAFE, what does Ada own?

Your answerCheck

The market-priced part: the MFN SAFE

The $375K SAFE has no cap. It is an Uncapped SAFE with an MFN clause provision. MFN is short for “most favored nation.” The YC deal page gives the rule: “YC’s MFN SAFE will automatically convert in the priced round on the terms of the lowest cap SAFE (or other most favorable terms, such as a discount) issued between the specific MFN start date (around the start of the batch) and the priced round.”

In plain words, the MFN SAFE buys at your next price. Let C be the lowest post-money cap of the SAFEs that you sign after the MFN start date. Then:

MFN SAFE stake = $375,000 ÷ C
YC stake       = 7% + $375,000 ÷ C

YC gives an example on its deal page. If your next SAFEs have a $15M cap, the MFN SAFE converts into $375,000 ÷ $15,000,000 = 2.5%. YC then owns 7% + 2.5% = 9.5% when the SAFEs convert.

Three cases can occur:

• You sign more SAFEs after the batch starts. The MFN SAFE takes the lowest cap, or the best discount. For example, you sign one SAFE at a $25M cap and one at $30M. The MFN SAFE takes $25M and converts into 1.5%.
• You go directly to a priced round. With no new SAFEs, the MFN SAFE has no cap and no discount. It converts at the same price for each share as the new investors pay.
• You signed a low-cap SAFE before the batch. The MFN SAFE counts only the SAFEs from the MFN start date, so that SAFE does not change YC’s price. A low-cap SAFE during the batch does. The lesson after Demo Day shows what that costs.

Predict first

After Demo Day, Northwind signs SAFEs at a $20M post-money cap. What part of the company does YC own when the SAFEs convert?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Your guessSave my guess

Now move the cap yourself. Look at what happens to YC’s stake at a low cap, and how slowly it comes down at a high cap.

Calculator

What YC owns when your SAFEs convert

Move the cap of the SAFEs that you sign after the batch starts. YC's MFN SAFE takes that cap.

Post-money cap of your next SAFEs

$15M

MFN SAFE converts into

2.5%

$375K ÷ $15M

YC owns in total

9.5%

7% + 2.5%

Blended valuation

$5.26M

$500K ÷ 9.5%

• YC in total
• Fixed 7% from the $125K SAFE

When the SAFEs convert, YC owns 9.5%: the fixed 7% from the $125K SAFE, plus $375K ÷ $15M = 2.5% from the MFN SAFE.

The $125K pays a fixed price, a $1.79M post-money valuation. The $375K pays your price, $15M. Together, the $500K gets a blended valuation of $5.26M. A higher cap brings YC closer to 7%, but YC never owns less than 7%, and the blended valuation never goes above $7.14M.

The blended valuation

YC’s $500K buys at two prices. To compare the deal with other offers, you can calculate one average price for all the money. This average is the blended valuation:

Blended valuation = All the cash ÷ All the ownership
                  = $500,000 ÷ (7% + $375,000 ÷ C)

The table shows two facts. First, a better next round gives YC less, but YC never gets less than 7%. Second, the blended valuation of the $500K is never more than approximately $7.14M, which is $500,000 ÷ 7%.

Work it out

Northwind's SAFEs after Demo Day have a $25M post-money cap. What is the blended valuation of YC's $500K?

Your answerCheck

Through a priced round

The SAFEs convert at a priced round. The YC deal page says that the three events occur at the same time, but the calculation has a fixed sequence:

1. All the SAFEs and other convertible instruments convert into preferred shares.
2. The company makes or increases the option pool to an agreed percentage.
3. The new money comes in.

Steps 2 and 3 dilute YC, the same as they dilute the founders. Thus “7%” is YC’s stake after step 1 only. Step 1 uses the Company Capitalization, the share count into which a post-money SAFE converts. The worked example puts Northwind through the three steps. The lessons on the option pool shuffle and a full Series A tell more about steps 2 and 3.

Worked example · step 1 of 6

Northwind from the YC deal to a Series A

1. 1

   Start with the cap table

   Ada and Ben hold 9,000,000 shares, and the unissued option pool has 1,000,000 shares. After Demo Day, Northwind raises $3M on post-money SAFEs at a $30M cap. Then a Series A raises $12M at a $48M pre-money valuation, with a 10% pool after the round.

   Founders           9,000,000
   Unissued pool      1,000,000
   Fully diluted     10,000,000

Show step 2Show all steps

Now set the rounds yourself. The calculator starts with the worked example. Change the cap of the SAFEs, and look at YC’s MFN SAFE. Then change the Series A, and look at what the pool and the new money do to YC’s two stakes.

Calculator

The YC deal, from the batch to your next priced round

Northwind Labs joins YC with 9,000,000 founder shares and a pool of 1,000,000 shares. Set the rounds that come next.

After Demo Day, Northwind raises

SAFEsA priced seed round

SAFEs after Demo Day

Money raised on SAFEs

$3M

Post-money cap of the SAFEs

$30M

The Series A

Pre-money valuation

$48M

New money

$12M

Option pool after the round

10%

YC's $125K SAFE

5.34%

7% when the SAFEs convert

YC's MFN SAFE

0.95%

1.25% when the SAFEs convert

YC in total

6.29%

8.25% when the SAFEs convert

Founders

56.09%

73.58% when the SAFEs convert

1. When the SAFEs convert

• Founders
• Option pool
• YC
• Seed SAFE investors

2. After the Series A

• Founders
• Option pool
• YC
• Seed SAFE investors
• Series A investors

YC's MFN SAFE takes the $30M cap of your SAFEs: $375K ÷ $30M = 1.25%. So when the SAFEs convert, YC owns 8.25%, and the founders own 73.58%.

The Series A sells 20% of the company and increases the pool to 10%. These new shares dilute everyone, YC too. YC ends with 6.29%, and the founders end with 56.09%.

Show the cap table after the round

What YC does not take

The deal has few extra terms. YC writes that it does not charge fees to the companies in YC. YC also writes that it tries to keep “gotcha” terms out of the deal, such as “enhanced returns in downside exit scenarios.” These are extra payouts to an investor when the company sells for a low price.

YC does get one more right. A separate YC Agreement gives YC “a participation right to invest in the company’s future financing rounds.” This is a pro rata right. YC can buy a part of later rounds to keep its percentage, but it does not have to. The lesson on pro rata rights shows the math.

How the deal changed

The YC deal changed several times. The fixed part changed little. The large change came in January 2022, when YC added the uncapped MFN SAFE.

The sources for this lesson do not give the year when the fixed part changed from $150K to $125K. In 2014, $120K for 7% implied a $1.71M post-money valuation. Today, $125K for 7% implies $1.79M. Thus the price of the fixed 7% is almost the same. The new money is the MFN SAFE, which buys at the market price.

Quiz · question 1 of 6

Test what you learned

Under the YC standard deal, what does YC's $125,000 SAFE get?

• AShares at the price of your Demo Day round
• B1.875% of the company
• CA fixed 7% of the company when the SAFEs convert
• D7% of the company, and the $375K is part of that 7%