I don't understand at all. I know nothing about startups - so is it an additional 7% that YC owns for every additional 125k, so 28% for 500k? Disclosure - I did not watch the SAFE video.

Roughly: The additional converts at the best deal another investor gets at/before the next priced round.

If the next priced round is at $7.5M, their $375K converts at that price (so it buys them another 5%). If your next round is not above $1.8M, it’s already an unfavorable sign.

The only downside I see is it doesn’t let you raise another small amount without valuing YC’s follow-on $375K. You might want to do such a raise for strategic rather than financial reasons and this would be an overhang against that. (I don’t think it’s that big a deal in practice and the additional committed money is probably better by way more than this detriment.)

I think you can just do more MFN SAFEs for small follow-on, if an investor is willing (maybe not though if there is no discount)

In practice for small round you will be raising SAFEs instead anyway, so it might be fine for early companies.

Nope. It's $125k for 7%; then the 375k are on terms of next equity round.

So the first tranche values your company at 1.78 million; if, afterwards, you raise more money at 6 million valuation, YC gets another 6.25% for 375k.

Correct me if I'm wrong.