SAFE & Convertible Note Review for Pre-Seed Startups
A plain-English guide to YC post-money SAFEs, convertible notes, KISS agreements, and the cap-table decisions that can reshape a pre-seed round. Educational, not legal advice.
Educational guide · Last reviewed August 10, 2026
By Dontay Phillips, Founder & Principal Attorney, ClearScope Counsel
SAFEs and convertible notes can help a startup raise capital without negotiating all the terms of a priced equity round. They do not make the economics disappear. They move much of the share-price and dilution calculation to a later financing, while fixing important conversion rights today.
That is why a short document can still create a large cap-table consequence. The risk is rarely one unfamiliar clause viewed in isolation. It is the interaction among the instrument, valuation cap or discount, later financings, option-pool changes, side letters, and every other outstanding convertible security.
Before signing, identify the exact form and version, model every outstanding SAFE and note together, and read the conversion, liquidity, amendment, and side-letter provisions — not just the headline valuation cap.
First, identify what you are actually signing
The words SAFE, convertible note, and KISS are sometimes used as if they describe the same bargain. They do not.
| Feature | YC-style post-money SAFE | Convertible note | Debt-style KISS |
|---|---|---|---|
| Legal form | Contractual security providing a future right to receive shares; generally not debt | Debt obligation that may convert into equity | A convertible security that, in the supplied debt form, has note-like features |
| Interest | None in the standard YC form | Usually accrues | The supplied form accrues interest |
| Maturity | None in the standard YC form | Usually has a maturity date | The supplied form has a maturity date |
| Main conversion event | An equity financing, with separate rules for liquidity and dissolution events | A qualifying financing, maturity, or another negotiated event | A qualifying financing, maturity, or another event defined in the agreement |
| Common economic terms | Valuation cap, discount, or MFN, depending on the form | Valuation cap, discount, interest, maturity, and sometimes a financing threshold | Cap and discount mechanics, interest, maturity, MFN, and investor rights vary by version |
| Investor rights | Usually limited unless added by a side letter | Vary by document | May include information, participation, and other rights |
A SAFE is not a “SAFE note.” It is generally not debt, and its holder ordinarily does not have voting or other stockholder rights until shares are issued. The standard YC form also contains a stated tax intent, however, so tax and accounting treatment should be reviewed separately rather than inferred from the label.
A KISS — short for Keep It Simple Security — also requires form-specific review. KISS documents have appeared in both debt and equity versions. The debt-style form reviewed for this article is materially different from a standard YC SAFE: it includes interest, a maturity date, a qualified-financing threshold, and additional investor protections.
The current YC post-money SAFE forms
For U.S. companies, Y Combinator currently publishes three separate post-money SAFE forms and an optional pro rata side letter:
- Valuation Cap, no Discount
- Discount, no Valuation Cap
- Uncapped MFN, with no Valuation Cap and no Discount
- Optional Pro Rata Side Letter
That lineup matters. The current standard YC form does not combine a valuation cap and a discount in one SAFE. A convertible note, customized SAFE, or older instrument may contain both and use whichever produces the more favorable conversion price. Do not assume that mechanic is present without reading the document.
Valuation-cap SAFE
A valuation cap is part of the formula used to determine the SAFE’s conversion price. Economically, a lower cap generally gives the investor more shares for the same investment if the next financing is priced above the cap.
For a post-money cap SAFE, a useful first estimate is:
Purchase amount ÷ post-money valuation cap = estimated ownership sold by that SAFE before the new money in the priced round.
For example, a $250,000 SAFE with a $5 million post-money cap points to approximately 5% before dilution from the new priced-round investment and certain other changes.
That is an estimate, not a universal answer. Do not apply it to a pre-money SAFE. Even with a post-money SAFE, if the priced round valuation is below or too close to the cap, the SAFE’s other conversion formula may control and the investor can receive more ownership than the simple estimate suggests.
Discount SAFE
A discount SAFE converts by reference to the price paid by new-money investors, adjusted by the negotiated discount.
Read the defined term carefully. In the YC form, “Discount Rate” means 100% minus the discount. A 20% discount is therefore expressed as an 80% Discount Rate. Confusing those two numbers can materially distort a cap-table model.
MFN-only SAFE
An uncapped most-favored-nation SAFE starts without a valuation cap or discount. If the company later issues a qualifying convertible security with more favorable terms before the MFN SAFE terminates, the holder may receive notice and elect to amend into the later instrument’s terms.
Under the YC form, MFN is not a license to select the best clause from several documents. The holder elects the later instrument as a package, and the amendment generally makes the earlier SAFE identical to it except for necessary identifying information. Side letters do not automatically become part of that election merely because they were signed alongside a later financing.
“If this MFN right is exercised, which complete later instrument can the investor adopt, what notice must we give, and does the amendment preserve any further MFN right?”
Pro rata side letter
Pro rata rights allow an investor to buy securities in a later financing to preserve some or all of its ownership percentage. The current YC SAFE does not include that right by default; YC provides a separate optional side letter.
Pro rata rights do not change the SAFE’s initial conversion calculation by themselves. They can, however, reserve part of the next round for existing investors and reduce the space available for new lead or strategic investors. Track every side letter alongside the instrument it modifies or supplements.
The stacking problem: model the whole cap table
Pre-seed companies often close investors at different times and on different terms. Each SAFE may look manageable alone. Together, they can sell a much larger portion of the company than the founder realizes.
For a simplified illustration:
- $200,000 on a $4 million post-money cap points to approximately 5%; and
- $300,000 on a $6 million post-money cap also points to approximately 5%.
Viewed together, the company has sold approximately 10% through those cap SAFEs before dilution from the new money in a later priced round. The actual financing model still must account for the priced-round valuation, the option pool, any notes or other convertibles, and the governing definitions in each document.
Maintain three connected views:
- Issued and outstanding. Shares actually issued today.
- Fully diluted. Issued shares plus outstanding options, warrants, and the relevant reserved option pool.
- Financing pro forma. The fully diluted view after converting every SAFE and note, adding the priced-round shares, reflecting any option-pool increase, and applying side-letter participation.
The option pool deserves its own scenario. Under the YC post-money framework, the company capitalization used in the SAFE math generally includes the existing unissued option pool and certain promised options, but not an option-pool increase adopted in connection with the priced round. That increase can dilute founders and SAFE holders. Model the pool at its current size and at the size the next lead investor is likely to request.
For each convertible instrument, track at least:
- investor and purchase amount;
- form name, version, and signature date;
- post-money or pre-money structure;
- valuation cap, discount or Discount Rate, and MFN status;
- interest, maturity, and qualified-financing threshold for notes or debt-style KISS agreements;
- pro rata, information, or other side-letter rights;
- amendments, waivers, and later MFN elections; and
- payment status and a link to the fully executed document.
“After every outstanding SAFE, note, KISS, option, warrant, promised grant, option-pool increase, and pro rata exercise is included, what do the founders, investors, and employees own immediately after the next round?”
The terms that deserve more than a headline review
Conversion definitions
Confirm what counts as an equity financing or qualified financing. A convertible note or KISS may require a minimum amount of new capital before automatic conversion. Check which security the instrument receives, how the price is calculated, and whether accrued interest also converts.
Liquidity and dissolution events
Do not review the document only for the expected priced round. Read what happens in an acquisition, change of control, direct listing, public offering, or shutdown. The standard YC SAFE generally gives the holder a contractual choice or waterfall treatment based on the purchase amount and an as-converted return, subject to the document’s priority rules. A note or KISS may provide different multiples, payment elections, or seniority.
Interest, maturity, default, and subordination
These are central note and debt-style KISS provisions, not boilerplate. Ask what happens if no qualified financing occurs before maturity, whether the holder can demand cash repayment, whether conversion is automatic or elective, what constitutes default, and where the instrument sits relative to bank or other debt.
Amendments and waivers
Some forms allow specified terms to be amended by the company and a majority in interest of holders with matching terms. That can bind an investor who did not sign the amendment, subject to stated limits. Group instruments by their actual terms and read the consent threshold before promising an amendment or waiver.
Side letters
A short side letter can carry pro rata, information, board-observer, “major investor,” or other rights not visible on the face of the SAFE or note. Keep the signed side letter in the same closing record and include its obligations in the financing model and diligence schedule.
A form is not the financing process
SAFEs, notes, and KISS agreements are securities. Every offer and sale must be registered or fit an available federal exemption, and state notice or qualification requirements may also apply. Friends-and-family investors do not create an automatic exception.
Before accepting funds, confirm the complete closing process, including:
- board and any required stockholder approvals;
- sufficient authorized stock and a current capitalization record;
- the federal and state securities-law exemption being used;
- whether general solicitation is permitted under that exemption;
- investor questionnaires, representations, and supporting verification when required;
- Form D and state notice filings, if applicable;
- signed documents, wire confirmation, and issuance records; and
- tax, accounting, and financial-statement treatment.
The standard U.S. YC SAFE is drafted for a corporation. An LLC, non-U.S. entity, or company with unusual existing securities should not assume the form fits without tailored review.
Before you sign: a practical review list
- Confirm the exact instrument, form, version, and governing law.
- Model the full cap table before and after the contemplated raise.
- Run at least an expected round, a valuation near or below the cap, an early sale, and a no-financing scenario.
- Reconcile every SAFE, note, KISS, warrant, option, promised grant, and side letter.
- Check valuation-cap and discount definitions rather than relying on the term sheet or email summary.
- Review MFN notice, election, amendment, and termination mechanics.
- Quantify pro rata commitments and the space left for new investors.
- Test the effect of the anticipated option-pool increase.
- Review liquidity, dissolution, maturity, default, and priority provisions.
- Confirm corporate approvals, the securities exemption, and required federal and state filings.
- Store the executed agreement, payment evidence, approvals, filings, and cap-table entry together.
Common form documents and further reading
The following forms are widely encountered in early-stage financing. A blank form is not a recommendation, a substitute for legal advice, or a ready-to-sign agreement.
The SAFE forms are published by Y Combinator and were authored for YC’s documents page by Carolynn Levy. The SAFE forms below are © 2023 Y Combinator Management, LLC, and the Pro Rata Side Letter is © 2018 Y Combinator Management, LLC. They are distributed here unchanged under the Creative Commons Attribution-NoDerivatives 4.0 International License. Original source: ycombinator.com/documents. Y Combinator does not endorse ClearScope Counsel.
ClearScope Counsel LLC does not assume responsibility for the contents of, or the consequences of using, any version of the SAFE or any other document found on our website. Before using any of these forms, you should consult with a lawyer licensed in the jurisdiction where your company was formed.
Download the forms
- YC Post-Money SAFE: Valuation Cap, No Discount — DOCX, © 2023 Y Combinator Management, LLC, CC BY-ND 4.0
- YC Post-Money SAFE: Discount, No Valuation Cap — DOCX, © 2023 Y Combinator Management, LLC, CC BY-ND 4.0
- YC Post-Money SAFE: Uncapped MFN — DOCX, © 2023 Y Combinator Management, LLC, CC BY-ND 4.0
- YC Pro Rata Side Letter — DOCX, © 2018 Y Combinator Management, LLC, CC BY-ND 4.0
- KISS (Keep It Simple Security): Debt Version — DOCX
Read at the source
- YC SAFE User Guide — read the original at Y Combinator
- KISS (Keep It Simple Security) overview — Cooley GO
Downloading a form does not create an attorney-client relationship, does not enrol you in anything, and costs nothing. The YC files are served exactly as published, with every embedded notice intact and no ClearScope branding added.
Frequently asked questions
No. At signing, the investor generally holds contractual rights under the SAFE, not issued shares with ordinary stockholder voting rights. Shares are issued when a triggering event and the form’s conversion mechanics require them. Tax and accounting characterization should be addressed separately.
A cap SAFE often permits a useful estimate by dividing the purchase amount by the post-money valuation cap. But a priced round at or near the cap, a lower valuation, the priced-round investment, option-pool changes, and other securities can change the final ownership result. Model the actual definitions and scenarios.
The current YC U.S. post-money forms separate those alternatives: cap with no discount, discount with no cap, and uncapped MFN. Convertible notes and customized or older forms may combine a cap and discount, so read the document rather than relying on the label.
Not necessarily. Under the YC MFN form, the investor receives a contractual election when the company later issues a qualifying convertible security. The election generally adopts the later instrument as a whole; it does not automatically cherry-pick isolated favorable provisions.
No. The current YC SAFE does not include pro rata rights by default. YC provides an optional side letter, and customized agreements can differ.
No. KISS documents exist in debt and equity forms. The debt-style form reviewed for this article includes interest, maturity, and other note-like protections that are absent from the standard YC post-money SAFE.
There is no fixed number. The better test is whether the company can accurately model every outstanding instrument, preserve enough ownership and option-pool capacity for its plan, and leave workable room for the next financing.
No. The SEC explains that every offer and sale of a security must be registered or rely on an available exemption. The applicable exemption, investor limits, disclosure duties, filing requirements, and state-law consequences depend on the facts.
Primary sources and further reading:
Understand the paper before it becomes your cap table.
Before you sign, have a lawyer model every outstanding SAFE and note together and read the conversion, amendment, and side-letter terms against your cap table.