Risk can be factored in to the terms of the deal. But there is no situation where it makes sense to offer the very first investors of an idea-stage company full, unlimited and indefinite dilution protection.
It used to be common and expected that early investors be given pro rata participation rights, so that they could maintain their ownership stake by participating in future rounds. YC’s new post-money SAFE terms effectively gift them equity in every future unpriced financing round. So if you need to do another convertible note round (which any hardware startup would), they effectively participate without having to give you a cent.
This is unheard of and ludicrous. But they get away with it because most software startups immediately raise a priced round on demo day anyway, so it’s a moot point for them. For hardware startups, this can become a poison pill.
It used to be common and expected that early investors be given pro rata participation rights, so that they could maintain their ownership stake by participating in future rounds. YC’s new post-money SAFE terms effectively gift them equity in every future unpriced financing round. So if you need to do another convertible note round (which any hardware startup would), they effectively participate without having to give you a cent.
This is unheard of and ludicrous. But they get away with it because most software startups immediately raise a priced round on demo day anyway, so it’s a moot point for them. For hardware startups, this can become a poison pill.