YC Post money SAFE = Full Rachet Anti-Dilution?

There is an interesting point regarding YC SAFES (post money). It (discreetly) has an anti-dilution clause that is not market at all : Full Rachet Anti-dilution

First of all... What is an Anti-Dilution clause?

a provision which protects an equity holder from dilution due to subsequent equity issuances (issued either directly or indirectly through options or convertible securities). <Thomson Reuters-practical Law>

Then...... What is a Full Rachet Anti-dilution clause?

“Full ratchet” refers to a type of anti-dilution protection for preferred stock in the event of a down round of series financing that adjusts the number of common shares the preferred shares can be converted into based on the new share price.

This method recalculates the number of common shares that preferred stock can convert into by dividing the original price of the preferred stock purchased by the current common share price. This method does not take into account the amount of financing raised in a down round, only the price per share. <Cooley>

Full rachet is so uncommon in US venture financing that 0% of deals done by Cooley in Q1 2024 has them, and they only appear in their data as 0.4% of the deals in the Q3 2023. (Below)

So its safe to say (no pun intended) that Full Rachet Anti-dilution provision are NOT market in US startup financing.

But now looking at the YC Post money SAFE - it never explicitly says Full Rachet Anti-dilution.

But....

This is equivalent to "full-ratchet" anti-dilution for SAFE investors. Full-ratchet anti-dilution is a mechanism used to protect investors if the company has a down-round (lower valuation), and is considered so unfair that it is rarely ever included in modern fundraising agreements. [Law for Startups]

YC Safes with valuation caps effectively give the holders full-ratchet anti-dilution rights. They are guaranteed a minimum percentage of the company (on a post-money basis). If the valuation of the next equity financing is below the cap, the Safe holders receive a higher percentage of the company, diluting all other stockholders. [Eisaiah Engel]

You have to reach page 22 in an example to realize there is something worse than a full ratchet built-in. [50Folds]

the reason we know precisely how much of the company the investor is buying is because the investor gets Full-Ratchet Anti-Dilution Protection at the expense of the founders. If there are future SAFE financings, whether up-round or down-round, then any dilution from the new rounds gets jammed into the founders side of the cap table. [PNW startup lawyer]

Under YC’s new SAFE, the common stock absorbs all dilution from any subsequent SAFE or convertible note rounds until an equity round, while SAFE holders are fully protected from that dilution [Jose Ancer post]

This means the holders of common stock (in early-stage companies, typically only the founders) will bear the entirety of dilution from other SAFE or convertible note rounds until an Equity Financing takes place [pillarlegalpc.com]

Conclusion

Post Money SAFE is the dominant instrument for (pre)Seed investments. And can have many benefits in using it. But know that the effective anti-dilution may not be what it seems or at least not that clear, and may warrant a closer look. For deeper legal advice, consulate a lawyer (if you need a recommendation let us know).