The main document fits in a short email. The side letter fits below it. Its position in the inbox should not determine its position in your diligence.
Some letters are mundane. Some promise information, participation rights or consent over specified actions. They are not interchangeable, and the mere phrase “side letter” tells you almost nothing. This part concerns the YC pro rata letter alongside a post-money capped SAFE. A negotiated letter needs its own review.
The provision on the table
Fictional side-letter summary: the capped SAFE investor may buy its defined pro rata share of the Standard Preferred sold in the conversion financing, using additional cash. In this exercise the total round size stays fixed.
Our explanatory wording, not a quotation or modification of a YC form. Open a margin note:
What this means
This is a purchase right, not free stock. It claims part of the new round’s allocation when exercised.
What works for you
An existing backer can fund the next stage and avoid percentage dilution from new cash within the modeled round.
Where it can bite
The same dollars may have been informally promised to the incoming lead. Other letters can add entirely different obligations.
If you do not ask
Model allocation with every right exercised. Identify when each right expires and distinguish this form from ongoing future-round rights.
Inside the investor’s head
A small early position can reserve access to a later winner. The investor must still pay to exercise.
The form gives the investor a right to buy a defined pro rata share of the Standard Preferred sold in the financing that converts the SAFE. Its ratio uses shares issued on conversion of the investor’s capped SAFEs against Company Capitalization. The right ends at the initial closing of that financing, or before specified earlier liquidity or dissolution events. It is not automatically an invitation to every subsequent round. 1
The investor pays new money to exercise. “Pro rata” is not a dividend of complimentary shares.
In our simple example, a $500,000 SAFE at a $5 million post-money cap represents 10% before the new round, when the cap determines conversion. If a fixed $2 million priced round lets that holder exercise its modeled 10% allocation, it supplies another $200,000. That cash occupies part of the $2 million, leaving $1.8 million for other purchasers.
Without the purchase, the investor’s pre-round 10% is diluted by new cash. With it, under these assumptions, the holder can finish with 10%. The founder does not get a dilution holiday; the identity of the new-money buyer changes.
There are two ways to make the room fit
One convention fixes the total round, as the SAFE Stack does. Exercising existing rights reduces the allocation available to the new lead. Another starts by reserving a target position for the lead and then fits the existing holders around it, potentially requiring a larger round. Those are different negotiations. Do not take a result from one model and present it as the other. 2
Our fictional lead would like its target ownership. Our fictional earlier investor would like its contractual allocation. The founder would like to announce a clean round on Thursday.
There is no misconduct in any of those preferences. There is also no reason all three can be satisfied with the originally advertised dollar amount. A document can be short because the collision has been scheduled for later.
A letter is not less real because it is separate
Keep a register of letters, not merely a column of caps. Who gets reports? What information can be withheld for confidentiality or privilege? Does a consent apply to ordinary operations or only specified financing events? Can a holder transfer the right to an affiliate? Which promises survive conversion?
Those are questions for the actual letter, not additional rights we attribute to the YC pro rata form. Copying a friend’s “standard side letter” can quietly move you from a purchase right into reporting duties or a negotiated veto.
A founder should ask for bounded duration, clear eligibility, sensible notice deadlines and manageable reporting. The investor may want visibility and the ability to keep backing a winner. Counsel should identify conflicts with future financing documents before there is a lead investor waiting to sign.
The useful conversation happens before the allocation email
Request an exercise-all-rights version of the next-round model. Ask which holders have agreed to waive anything, in writing. A friendly assurance that “we probably won’t take it” is not the same as a released allocation.
Our imaginary fund enjoys acquiring options while it is still called helpful. Your job is not to be ungrateful. Your job is to count the seats before inviting another lead investor to sit down.