[HN Gopher] YC's $500k Standard Deal
___________________________________________________________________
YC's $500k Standard Deal
Author : langitbiru
Score : 486 points
Date : 2022-01-10 17:36 UTC (5 hours ago)
(HTM) web link (blog.ycombinator.com)
(TXT) w3m dump (blog.ycombinator.com)
| Liron wrote:
| This is great. YC used to value companies below-market at $1.8M,
| and now it's effectively valuing them fairly at $5M+. I now feel
| good about recommending YC to founders.
|
| The argument that YC deserved to take 7% for $125k because it
| improved a company's prospects more than 7% stopped making sense
| when the ecosystem became increasingly full of helpful angels
| willing to pay $500k-1M for that same 7%.
| zffr wrote:
| Maybe it valued _some_ companies at below market for $1.8M, but
| YC also accepts pre-revenue and sometimes pre-product
| companies. Surely their market value is below $1.8M.
| Liron wrote:
| No, it's not. Show me a team of smart founders pre-product
| who are telling a coherent value prop story [0] and I'll show
| you a check for $125k at a $5M cap.
|
| [0] https://medium.com/bloated-mvp/how-to-sanity-check-your-
| star...
| jimhi wrote:
| Many, many people are not in the Silicon Valley bubble and
| don't get lucky enough to break in. I know tons of smart,
| coherent teams who struggle to this day or gave up.
|
| Every time I came into YC to interview (when it was in
| person) who did not get funded, in startup school, and all
| over SE Asia.
| Liron wrote:
| I'm just talking factually about the capital market.
| Plenty of funds would accept a deal of automatically
| funding all YC-accepted companies at a $5M valuation. I
| would take it myself as an angel investor. And now YC is
| taking it instead of lowballing.
| jimhi wrote:
| For reference, my company was only able to raise 10k at
| our demo day with a 6M Cap in 2018. This deal would have
| kept my cofounder and I from maxing out our credit cards
| & sleeping on our office floor for a year.
|
| We got acquired and I did well anyway but regardless...
| gkop wrote:
| Did you read the same post I read? 7% for $125K is not
| changing. Third sentence.
| Liron wrote:
| Did you read that they're giving $375k on an uncapped note?
| That's $500k for (7% + ?) of the company. When you realize
| that ? is only 1-2%, you realize YC thinks the company is
| currently worth $5M+.
|
| This is what's really going on: YC was bidding too low for
| companies, and now they're bidding higher so they don't lose
| out. They did a great job having people not think of it that
| way.
| gkop wrote:
| Without knowing the valuation that the SAFE converts at,
| there's no way to tell what percentage ownership YC will
| get for the $375K. So to recap, what we know is they get
| the usual 7% for $125K, plus whatever they get from the
| SAFE.
|
| You say this yourself with "That's $500k for (7% + ?) of
| the company."
|
| Bidding higher would mean more money for the same equity or
| less equity for the same money. That's not what's happening
| here.
|
| To be clear, the new YC standard deal is strictly better
| than the old one, because you don't have to take the SAFE.
| But it's not dramatically better. For many of us the 7% for
| $125K remains a nonstarter.
| Liron wrote:
| Wow people are struggling to realize that this deal is
| over twice as good of a deal as before (and the corollary
| that YC was previously lowballing).
|
| It's not a big mystery what the SAFE valuation cap is
| going to be. Post-YC valuations are generally $20M+ these
| days, and having $500k in the bank would presumably make
| them higher, which means the $375k will convert to 1.875%
| of the company or less.
| gkop wrote:
| It's twice (more than twice really) as good _only at the
| marginal percentage ownership beyond 7%_ , it's not twice
| as good of a deal in absolute terms. It reminds me of
| "buy one get one half off" - no, I'd like just one, for
| 25% off its list price, please. If YC revised their terms
| to 125K for 3.5%, _that would be twice as good a deal_.
| Liron wrote:
| Every company that applies to YC can expect to want
| $500k+ of capital at some point. It's extremely rare for
| them not to. The "no, I'd like just one" reaction doesn't
| make sense for a company that's aiming for a $billion+
| valuation, and those are the only companies that YC
| accepts.
| gkop wrote:
| This makes sense _if you wanted to sell YC 7% or more of
| your company_. Some of us want the benefit of YC without
| giving up so much of our company, and the new standard
| deal doesn 't do anything for us.
| [deleted]
| dannyw wrote:
| In 2020, YC cut the standard deal from 150k to 125k, while still
| preserving the 7% equity (and the 4% pro rata).
|
| To sell a solution, first create a problem ;)
| mesozoic wrote:
| How can you get involved with YC as an angel investor?
| jrochkind1 wrote:
| > also pointed out that if founders stay lean, this is more than
| enough capital to survive for years, regardless of the economic
| environment.
|
| What does this look like?
|
| I'm thinking 2 people's salary and overhead at say $110K each --
| including employer's taxes, healthcare, and all benefits, that's
| maybe salaries of like $75-85K? Which is of course not a lot of
| money at all by software engineer standards (or to live near YC
| HQ), but is that still more than YC means by "lean"?
|
| Because after two years that's $440K, leaving $30K/year for any
| infrastructure (like, that your software runs on) or marketting,
| or any other overhead at all.
|
| So, yeah, that's lasting for "years" (2, which is I guess the
| minimum amount of "for years"), with exactly two founder
| employees, but it definitely seems very very lean to me.
|
| How do you think YC is thinking about it, about like that, or I
| guess, even less take-home for the founders? Or is this not
| supposed to include the founders supporting themselves for those
| two years, is that not how it works? Or is the assumption they'd
| have at least a couple hundred thousand of revenue in those years
| too? Or thinking they will surely get some additional investment?
| (but that doens't seem to be what "this is more than enough
| capital to survive for years" suggests).
|
| I'm not saying 500K is "not a lot of money", of course it is!
|
| I'm just saying it's not clear to me how it's enough money to run
| a business "for years", even "leanly". Just curious how they're
| thinking about it like that, how I'm thinking about it
| wrong/different. I figure I don't know what I'm talking about,
| hoping someone will explain how it works!
| chubs wrote:
| I've also pondered how these sorts of VC things work. Are they
| just targeted towards people fresh out of university who can
| afford to live cheaply? Seems a lost opportunity to hire
| experienced (expensive) people who can execute with no
| problems. For instance, what if say 2 experienced people went
| in on a startup, simply paying themselves out of eg that 500k -
| 125k each per year? For instance in australia that'd almost be
| competitive vs just taking a normal software job if you're
| experienced. I'm just curious how these things work :)
| jakeinspace wrote:
| Could someone who has a better grasp of corporate/securities law
| explain to me why the following is illegal/impossible: conspiring
| with an investor to get a small follow-up investment round with
| an inflated valuation, thus reducing the dilution of the $375k?
| For example, after the initial $500k from YC, you get your VC
| buddy to invest $50k at 0.1% for a total valuation of $50M,
| diluting the $375k to a mere 0.75% stake. This feels fraudulent
| to me, and there's probably some language that YC uses to prevent
| this, but would is this otherwise illegal?
| chemeng wrote:
| Pro-rata rights prevent this, but it's an interesting question
| of whether it would be illegal.
| aripickar wrote:
| It's less that it's illegal/impossible and more that it's not
| in the interests of the company in the long run. Say you do
| that, then what? If you screw over the seed investors, they are
| probably are going to tell the series A (and B, C, etc)
| investors that you screwed them over, and its going to be a lot
| harder to impossible to raise the next rounds. Plus who would
| want to invest in a company when the founder already screwed
| over the last investors. The only way that it could work is if
| you are able to grow the company indefinitely without raising
| more money (See Toptal).
|
| Basically, you are exchanging all the goodwill and ability to
| raise in the future for a small percentage of equity. Not a
| great trade, if you ask me.
| ReaLNero wrote:
| I doubt PG is hastily rewriting all of YC's investment
| agreements as we speak to resolve this loophole!
|
| This very much depends on the contract that was signed between
| the company and YC. Most likely, the founder has a fiduciary
| duty to represent the stakeholders' financial interests. By
| maliciously diluting their equity, this would breach the
| contract, opening up the founder to lawsuits.
|
| A very relevant case is that of Eduardo Saverin's equity in
| Facebook getting diluted [0].
|
| [0]: https://en.wikipedia.org/wiki/Eduardo_Saverin#Career
| didip wrote:
| No more aiming for Ramen Profitable, I see.
|
| Is this forced evolution due to other VCs entering the early
| stage market?
| supernova87a wrote:
| More than the specific $ figure or % ownership etc (these are all
| minor details), what I'm interested in is the "general goal" of
| YC's approach. What the YC approach is aimed at creating and
| incentivizing founders to do, and how it might be different from
| other VCs.
|
| PG himself wrote about the dysfunctions of ("typical") VCs here:
| http://www.paulgraham.com/venturecapital.html i.e. emphasizing
| and incentivizing growth at all costs, stealing ideas,
| interfering with intelligent (but slower) management of a
| company.
|
| I assume that by contrast (if he's writing that), YC must take a
| different or better approach or philosophy.
|
| Is that true?
|
| edit: I'm being downvoted for asking an important but I guess
| slightly uncomfortable question?
| wantsanagent wrote:
| Is this an experiment? Is there a set of metrics being tracked
| which will inform continuation or reconsideration of this plan?
| mritchie712 wrote:
| This makes it much easier to get to profitability[0] and never
| raise again after YC (especially as a SaaS). I wonder how this
| will impact the decision to raise money after YC.
|
| 0 - Including paying the founders a reasonable salary
| itsoktocry wrote:
| > _This makes it much easier to get to profitability[0] and
| never raise again after YC (especially as a SaaS)._
|
| More money is better than less money, sure. But a couple
| founders and a couple engineers making reasonable salaries and
| 500k gets you, what, 1 year? 1.5? Profitability might still be
| challenging.
| mritchie712 wrote:
| The founders would need to be able to build the product
| themselves. It will be challenging, for sure, but I know
| about a dozen founders that have done it with less.
| ryanSrich wrote:
| Yeah no one talks about the cost of engineering. Most quality
| engineers are looking for $150-$200k salary to start. So a
| team of 5 is easily $1m after benefits, not to mention any
| equity grants. And that's before the founders take a salary,
| before they hire any designers, or marketing, or sales
| people. The cost of starting a tech company is still low
| relative to other fields, but it's increasing drastically.
| ramraj07 wrote:
| As OP mentioned, this works for years if a team of founders
| agree to take minimum wage salaries for a few years. If you
| need to recruit you're OOL.
| the-dude wrote:
| Are you sure this is how it would work? From the post I read
| the remaing 375k will be invested _at the next equity round_.
| uranium wrote:
| The terms are set at the next equity round. The money comes
| in right away.
|
| See the footnote:
|
| "Simply put, we're giving the company money now but at terms
| you'll negotiate with future investors."
| igammarays wrote:
| The full $500k is upfront. Quote:
|
| > Simply put, we're giving the company money now but at terms
| you'll negotiate with future investors.
| aripickar wrote:
| Not quite. The way that it works is that the 375k is invested
| now, but at terms that are determined in the next equity
| round. If the next round values the company at 10 million,
| then the 375k would be 3.75% of the company.
| ketzo wrote:
| Woah, okay, didn't totally understand that until you put
| some numbers on it.
|
| That's... almost _unbelievably_ founder-favored, yeah?
| Neat.
| mritchie712 wrote:
| Not unbelievably, just happens to be a win-win. The
| founder likely wants the capital now and YC wants more
| ownership.
| trenchgun wrote:
| Yes.
|
| The company gets the money now.
|
| The more they grow, the less YC gets for the 375k. But
| the more they grow, the higher the value of 7% is going
| to be. And also, the more they grow, the more they are
| likely to grow in the future. So the 375k share is also
| more likely to keep growing.
|
| So in a nutshell: the 375k is incentive for the company
| to grow, which is also in the interests of YC, since they
| have 7% (+ x%) and in general getting startups to grow is
| the whole point of YC.
| nirmel wrote:
| This is also not true. Their uncapped MFN note assumes the
| terms of the lowest-capped safe (or other investment) after
| their investment. So if founder accepts $3.75m capped safe
| soon after YC's investment, then later raises an equity
| round at $10m valuation, YC gets 10% more, not 3.75% more
| at that time. There may be dilution from the equity round
| but that's a different matter.
| robocat wrote:
| You are incorrect.
|
| As per https://www.ycombinator.com/deal "The $125k safe
| and the MFN safe will each convert into preferred shares
| when your company raises money by selling preferred
| shares in a priced equity round, which we refer to below
| as the "Safe Conversion Financing" (this will typically
| be your "Series A" or "Series Seed" financing, whichever
| happens first)."
|
| Edit: Sorry, I am absolutely wrong here. I completely
| misunderstood what nirmel was saying.
| beambot wrote:
| The MFN applies to other SAFEs too. YC will get the
| "best" price during the priced conversion. If you took
| other money at a lower SAFE, that would peg the "best"
| price in the conversion -- and thus, that's what YC's
| $375k would get.
| robocat wrote:
| Thank you for the correction. They mention this at the
| footnote of the article: "1 The $375,000 is on an
| uncapped safe with 'Most Favored Nation' (MFN) terms. MFN
| means that this safe will take on the terms of the lowest
| cap safe (or other most favorable terms) that is issued
| between the start of the batch and the next equity round.
| Simply put, we're giving the company money now but at
| terms you'll negotiate with future investors."
| tyre wrote:
| They are correct. The MFN safe converts at the best
| terms. So if there is a SAFE with a post-money $3.75m
| cap, then even if the next round is priced at $100m, YC
| gets 10% _at that 100m valuation_. It converts at an
| equivalent ownership compared to the cap. That 's why
| caps exist.
| solarmist wrote:
| What's not true? It seems correct to me.
|
| You're just providing an alternate scenario that isn't as
| favorable. And since the initial $125k implicitly has a
| $2m valuation attached to it, if you raise again at
| $3.75m, then that's probably not ideal.
|
| So a sensible approach would be to view this as providing
| an implicit minimum value to target for your next round,
| i.e., >$5m (7.5%).
| maximp wrote:
| I'm also confused about how this works. If you choose to never
| raise after YC, is the remaining $375K just part of of the 7%
| they take upfront, or is it only available if you raise?
|
| > Simply put, we're giving the company money now but at terms
| you'll negotiate with future investors.
| mritchie712 wrote:
| You get the 375k now, it is not part of the 7%. The
| incremental % they own wouldn't be determined until you raise
| again.
|
| But you could choose to never raise again. They'd still own
| some incremental amount of your company, but % would be a bit
| unclear unless you got a formal valuation outside of raising
| or sold the company.
| SmellTheGlove wrote:
| If you can build something with 500k and grow at VC-
| expected multiples without raising again, I'm sure that'd
| be a pretty positive conversation to go have with YC to
| determine the equity attached to that additional 375k!
|
| I think the issue is going to be that YC isn't looking to
| fund lifestyle businesses, so getting that initial shot is
| going to be tough. It just doesn't seem to me like YC is
| looking for companies that wouldn't have that next equity
| round.
|
| I've never gone through YC though, so don't necessarily
| take my word for it!
| [deleted]
| tptacek wrote:
| They would own the 7%, and have a debt claim in the amount
| of the SAFE on the company at liquidation.
| igammarays wrote:
| If you never intend to raise again after YC, I'm pretty sure
| that would be defrauding them. YC expects that you build VC-
| scale companies which require several rounds of additional
| funding, anything else is a failure, if I understand correctly.
| lazide wrote:
| Note on one point - _technically_ it doesn't require multiple
| rounds. For early investors, the fewer rounds before a large
| IPO, the better. If you made it huge and IPO'd as a billion+
| dollar company with only the YC funds? YC would be _thrilled_
|
| The reality is that is really really hard to do - harder even
| than doing it with extra funds - so it's foolish to have that
| as your goal, or be tied to that. Especially since the
| decisions required to do that would almost certainly
| hamstring your ability to get market traction, grow as
| quickly as you otherwise would be able, etc.
|
| YC, and most other investors, would much rather have 1% of a
| $10bln company than 10% of a $100mln company.
| tptacek wrote:
| You are getting downvoted to invisibility because YC doesn't
| ask you to raise again. You likely need to have the kind of
| company that could plausibly do so (ie, an idea that can
| scale), but lots of YC companies don't, and no YC process I'm
| aware of prods them to do so.
|
| Not raising again doesn't even violate the expectations of
| the program.
| andruby wrote:
| It might go against the expectations, but it would not be
| defrauding.
| igammarays wrote:
| Explicitly misrepresenting your intentions would be fraud
| though. I'm not talking about a company that intended to go
| big, but didn't quite take off. I'm talking about a founder
| who never intended to go big (keep a small bootstrapped
| company all the way), but applied to YC claiming big
| ambitions anyway, just to get the initial $500k check.
| robocat wrote:
| I would expect YC just to write off $500000k.
|
| For a lawsuit against a founder the reputation risk to YC
| is high. YC needs to keep their reputation for integrity
| high with their founders, and any lawsuit against a
| dishonest founder has a high risk of negative perceptions
| against YC with extremely costly outcomes for YC
| (regardless of how unfair that might be). Founders have
| enough worries without the added fear that YC might sue
| them.
|
| Also the opportunity cost of chasing a lawsuit is high: I
| would expect YC to focus their resources on their
| successful investments instead.
| spoonjim wrote:
| Fraud is a crime defined in law and this would not meet
| the bar.
| lazide wrote:
| That depends a whole lot on a lot of details not
| presented, I believe.
|
| For instance - did the founder have an explicit plan to
| do this in advance? Did they materially misrepresent
| their intentions to the investor while having this plan,
| with the intent to receive funds they otherwise would
| not? Was the investor concretely harmed by this
| misrepresentation?
|
| For instance if the investor still profited, it would be
| very difficult to argue fraud - not impossible of course.
| If the founder was thinking of this plan, but never wrote
| it down or said it to anyone, good luck proving fraud. If
| the founder had never been explicit to the investor, or
| was never asked by the investor what their plan was, so
| never materially misrepresented anything (even if the
| investor was clearly assuming), that would also be hard
| to argue fraud.
|
| Especially so if the investor had a decent amount of
| wealth or experience.
|
| This is why transparency - and due diligence - are so
| important for all parties. And why it's important to not
| put all your eggs (or even most of them) in one basket.
| For everyone.
| solarmist wrote:
| Do you think the idea that popped into your head after
| reading this is something that didn't occur to them? A couple
| of YC companies have not raised additional VC rounds after
| YC.
|
| I re-read the MFN SAFE contract. The second clause discusses
| "liquidity events." I.e., IPOs or selling the company. And
| discusses the details of that.
|
| The only way around it would be to build the company after YC
| without further investment and to keep it private
| indefinitely, a la Gumroad, but given most company employees
| are also working partially for equity, that's generally a
| non-starter already. At that point, VCs usually make offers
| to the founders to buy back the equity for some amount to
| clear their books. I don't know if YC does this, though.
|
| TL;DR The only way to not "convert" the $375k (this applies
| to the $125k SAFE too) would be to keep the company private
| forever which for most startups is a non-starter since
| employees generally want some equity.
| andrewmcwatters wrote:
| I've always been casually curious about applying to YC, but I'm
| allergic to the terms because they are not in plain English.
|
| I'm not interested in learning about SAFEs or cap tables or any
| of that. I'm interested in running profitable businesses with
| basic P&L statements and not owing anyone anything.
|
| If you immediately value my business at $1.7 million, I should
| probably in the next 12 months be making $1.7 million in revenue
| as a baseline. So how is Y Combinator going to help me do that?
|
| Engineers are expensive. How is Y Combinator going to help me
| sell my product and grow so I can pay my staff?
|
| Why would I not just take a bet on a PR firm[1] since advertising
| is a total wash for small businesses?
|
| [1]: http://www.paulgraham.com/submarine.html
|
| Edit: I'm very happy for you that you think SAFE and maybe
| valuation cap, discount (without context), MFN, pro rata, "high
| resolution fundraising" are basic terms, but for most US citizens
| they are not, and for non-US citizens even less so.
|
| Y Combinator goes to great lengths to attempt to describe these
| concepts, at least one of them they introduced and didn't exist
| anywhere else in fundraising prior, but they go to little to no
| lengths to explain how they will help you grow your business.
| jedberg wrote:
| > I'm not interested in learning about SAFEs or cap tables or
| any of that.
|
| Then YC isn't for you. They want people who are interested in
| learning about cap tables and SAFEs.
| corry wrote:
| Re: "not plain English" - YC is BY FAR the most transparent and
| founder-friendly VC seed investor and goes to great lengths to
| educate founders.
|
| This is as clear language as financings get in startup land.
|
| If you're unwilling to learn basic terms and concepts of equity
| financings, than building a company using VC is probably not
| for you (which you seem to already know, given your "I'm
| interested in running a profitable business... and not owing
| anyone anything").
|
| If, however, you have an idea that you think could be massive,
| and are therefore considering raising money from VC to get
| there faster, then you could start in no better place than YC.
| bretpiatt wrote:
| Based on your statement of "...not interested in learning about
| SAFEs...and not owing anyone anything" you are not interested
| in running a venture investor backed business. You want to
| bootstrap[1].
|
| [1]
| https://en.wikipedia.org/wiki/Entrepreneurship#Bootstrapping
| ngoel36 wrote:
| Is it required to take the $375k note? If so, definitely a bad
| deal for some, and disincentivizes taking on early angels at an
| attractive cap.
| ghshephard wrote:
| Can you explain how it could be a bad deal for some - I'm
| struggling to understand what at all could be negative - this
| feels like 100% upside for the founders.
| ngoel36 wrote:
| It's upside if you need the money right away.
|
| It's a bad deal if you have other willing investors. Let's
| say you exit YC and have a helpful angel (or many) who want
| to invest. Without the YC note, you may choose to let them
| invest $20-50k checks at a good deal, say (just example
| numbers) $12-15M post, before you raise a proper seed at
| $20M+ post. In that scenario, the YC note converts with the
| helpful angels.
|
| In another scenario, let's say you get a term sheet for your
| seed at demo day, $3M @ $20M post from a firm that wants 15%.
| Then you add in another $1M from angels (5%) and the
| mandatory $375k from YC (1.8%) and you're at 21.8% dilution.
| Or you take $375k less and cut out angels you wanted on the
| cap table.
| mizzao wrote:
| Couldn't you just offer an uncapped SAFE/MFN to your angels as
| well?
| loceng wrote:
| I imagine that'd not be what YC would expect but good
| question if they'd accept it.
| gumby wrote:
| It's uncapped. Why would you ever prefer a capped note?
|
| Doing a deal with YC never excludes you from doing a separate
| deal with someone else as well.
| tyre wrote:
| You would prefer a capped note if you think you'll raise at
| lower caps. If you think you'll raise at a $10m post-money
| cap then a SAFE with a $20m cap is better than an MFN SAFE
| gumby wrote:
| I don't understand. When would a company _ever_ want a
| capped note? It only provides a benefit to an investor, at
| the company 's expense.
| ngoel36 wrote:
| No reason to prefer the capped, but I definitely might prefer
| to not take the note at all.
| rexreed wrote:
| How does a "$375,000 is on an uncapped safe with "Most Favored
| Nation" (MFN) terms" work when the company doesn't raise a
| subsequent round? Say, they get acquired or go bust or something
| else happens?
| tptacek wrote:
| You can just look this stuff up in the "User Guide" for YC's
| SAFEs. The short answer is that they're just debt with no
| maturity date; the issuer is in line with all the other junior
| debt when the company liquidates, meaning that if the company
| is acquired YC will get some money back, and otherwise they
| generally won't.
| jmacd wrote:
| It is just debt then.
| rexreed wrote:
| But under what required re-payment terms? My understanding is
| that SAFEs are not really meant to be debt instruments, and
| that they are highly unsecured / non-collateralized forms of
| debt.
|
| I was recently screwed over as an angel investor in a SAFE
| deal where the startup got acquired before their Series A,
| and I was just completely out of luck. "Thanks for the money,
| sucka" said the startup. Not verbatim, but that was the idea.
| Startup got the seed money, founders got the acqui-cash,
| angel investor chumps got nada.
|
| As to debt, you might want to read this:
| https://www.upcounsel.com/safe-notes
|
| "Startups may prefer SAFE notes because, unlike convertible
| notes, they are not debt and therefore do not accrue
| interest."
| tptacek wrote:
| This is common to all sorts of funding arrangements (the
| classic example is departed cofounders). The moral of the
| story is that startups are generally either runaway
| successes, and everyone gets paid, or they're not, in which
| case the best case is that a subset of the operators and
| employees get a soft landing. If you're investing at the
| seed stage, presumably you should not be expecting to
| recoup on acquihires.
| rexreed wrote:
| The acquihire situation happens a lot more than might be
| anticipated, and usually it's the angel investors left
| holding the bag. Startups anticipating an acquihire in
| their future should really look for grants, SBIRs, or
| other similar funding arrangements because as an angel
| investor, I have to tell you that the loosey-goosey
| nature of SAFEs have put me off investing in seed stage
| startups altogether. I certainly have felt like a chump
| and not a winner, and I couldn't really celebrate for the
| startup's "success" as an acquihire.
|
| In fact, the increased size of this SAFE will guarantee
| more situations where startups exit before the next
| priced round. The more money that's put into early non-
| priced / non-secured rounds, the more you open up the
| door to early exits. This is because you're providing
| more runway. More runway means more time to develop the
| business, which also means more opportunities and time to
| exit before a first round.
| tptacek wrote:
| Sure. An acquihire is a business failure. If it bugs you
| that you lose your investment on them, I don't know what
| to say; I assume that if you're investing at scale, you
| mostly don't care (your returns are defined by the actual
| wins); if you're not, I'm baffled by why people do hobby
| startup investing at all. It seems crazymaking. But then,
| I'm an, uh, "operator", so I would think that.
| rexreed wrote:
| It's pretty sad to say this, but the vast majority of
| Angel investors are hobby investors, not investing at any
| degree of "scale". And most often, let's be honest, these
| "investments" should be considered grants to the
| founders, or perhaps lottery tickets with the expectation
| of full loss of value, and not really any expected
| return. It is pretty much crazymaking, as you put it.
|
| But to the point above about losing the "investment" in
| acquihire situations. The loss is primarily caused by the
| fact that the investment vehicle is an unsecured non-debt
| obligation. Which means that there's really nothing to
| protect the investor in the situation where there's no
| conversion. If the Acquihire company had instead raised a
| priced round (the old Seed Series priced round) instead
| of a SAFE, the investor would be protected. SAFEs should
| really be "bridge" investments when there is an expected
| conversion opportunity in the short-term. Not for
| indeterminate conversions that may or may not ever
| happen. In fact, if I'm not mistaken, the SAFE note (and
| convertible debts) originate with the idea of bridge
| loans, since that makes complete sense in that situation.
|
| Indeed, it's the combination of the hobbyist investor and
| the Uncapped SAFE notes that are not the best
| combination. Only sophisticated, at-scale investors
| should invest in Uncapped SAFE notes, and they can then
| be prepared for the expected downsides.
| tptacek wrote:
| Without saying anything about our company's seed
| investors (I wasn't here when we did the seed round), the
| YC companies I've been friends with raised their seed
| rounds from a mix of "firms" (I didn't do much digging
| but they all seemed to make lots of investments; ie, at
| scale) and friends or industry acquaintances. It may just
| be the case that we hear mostly the hobbyist perspective
| here, because the people who do seed investing seriously
| don't bother to wade into HN comment threads.
|
| If you kick in on a friend's company, you shouldn't care
| what happens if their company has a soft landing; having
| that level of concern over an investment seems like a
| really good way to kill a friendship. The friendship is
| more valuable.
| rexreed wrote:
| Mixing investment and friendship is NEVER a good idea,
| and is definitely not the situation in my case, nor that
| of the other angel investors similarly burned in these
| situations. I live by Benjamin Franklin's words on never
| a borrower or lender be to friends.
| [deleted]
| sneak wrote:
| > _Dalton Caldwell, YC's Managing Director, Architect, and long-
| term Group Partner, who first suggested that now was the right
| time to make this change, also pointed out that if founders stay
| lean, this is more than enough capital to survive for years,
| regardless of the economic environment._
|
| I'm all for being scrappy, but unless the definition of "years"
| is precisely 24 months, this isn't much money split between 3 or
| 4 people, unless they're all living in Kansas City or something.
|
| It's my belief that anyone talented enough to start a startup in
| earnest and be worth investing in has job opportunities worth
| enough these days that this is almost a ridiculous claim
| (narrowly escaping being such by use of the term "survive",
| apparently in earnest).
|
| I am reminded of the jwz nscpdorm disclaimer.
|
| Of course founders earn less in salary than they would get as
| wages as non-founders, but to think that this is a lot of money
| to a 3 or 4 person founding team "regardless of the economic
| environment" in the middle of the highest inflation of my entire
| life is a little... misleading?
| divbzero wrote:
| Are there considerations to make YC permanently remote? Or does
| the traditional in-person requirement offer benefits that will be
| worth reinstating in the future?
| [deleted]
| devops000 wrote:
| Is it not better to bootstrap a company ?
| badcede wrote:
| I love the comments saying that giving $500k instead of $125k
| will make things worse. Clearly YC should have made things better
| instead, by giving less!
|
| Why stop there though? If YC really cared about founders, they'd
| give them nothing. Better yet, make them pay - now that would
| have really been helpful! But no. Clearly YC doesn't care about
| founders and is only trying to exploit them.
|
| YC really ought to stop making things worse for founders like
| this. I mean how dare they.
| rfw300 wrote:
| We can call it a tuition fee!
| gotsa wrote:
| This is brilliant.
| truthwhisperer wrote:
| zuhayeer wrote:
| I like that the new terms are backwards compatible with people
| doing YC now. If you're currently in YC or just graduated and
| need some money, it might be worth asking for the $375k note.
| SubuSS wrote:
| Are there terms around how the money is spent / how much founders
| get paid? Also is there some kind of yc health insurance?
|
| I see mention of 40k/founder/yr - imo that leaves out the huge
| demographic of folks with kids.
| throwaway879080 wrote:
| awesome, we might consider YC after all
| sudosteph wrote:
| The entire reason I didn't apply last season was because despite
| being my startup looking for funding, and despite us having our
| best traction to date (functional MVP deployed in big retail
| partner, making sales) - the $125k (minus the cost of uprooting
| our team and product to CA) was just a bad deal. We've been in
| talks with some angel groups with 500K being the ask for the pre-
| seed, and that has been well received. So I think 500K is right
| on the money for now. It's a good change to see!
| mesozoic wrote:
| What kind of percentage range was that 500k preseed at?
| sudosteph wrote:
| SAFE with a cap of 5mil. So at least 10%.
| ignoramous wrote:
| YC has to react to VCs entering early stage investment. Accel in
| India _grants_ upto $250K to startup founders (no strings
| attached) [0], while Sequoia seeds select startups with $1M in
| capital [1]. In India, $250K 's roughly worth what ~$4M would be
| in the US.
|
| Just to put the amount in perspective: Our team of 3 engs in
| India got a generous $12K grant from Mozilla in June 2020, which
| has kept lights on our toy project for 2 years now. I think we
| can stretch that budget to 3.
|
| YC $500K is a total game changer for startups overseas (esp in
| countries with lower cost of living).
|
| [0] https://atoms.accel.com/
|
| [1] https://surgeahead.com/
| tedivm wrote:
| A startup I was at had plans to apply to join YC but then
| pulled in $4.5m in funding as a seed round. There's just so
| much money out there right now, I can't imagine giving up 7%
| for what amounts to pennies.
|
| Admittedly joining YC in theory has knock off benefits like AWS
| credits, but the reality is most companies willing to give you
| discounts or credits because of YC will give you that same
| discount just for getting funding. You're basically giving up
| that equity for networking.
| syedkarim wrote:
| Accel's $250k deal does not appear to be a grant, which is
| truly no-strings attached money. It looks like a convertible
| note with no valuation cap; so non-dilutive until the first
| priced-round.
| PragmaticPulp wrote:
| YC's value is still in the networking and signaling aspects.
|
| I've interviewed and worked with a surprisingly large number of
| YC founders whose startups didn't go anywhere. It's amazing how
| much weight the YC founder background carriers in tech circles.
| For the one person I'm most familiar with, their YC startup
| went nowhere, they didn't even get a prototype put together,
| and the team fell apart because they couldn't get along with
| each other. Yet just mentioning their YC founder background or
| putting it in a resume (or Twitter bio) grants them instant
| credibility and a huge reputation boost. It's fascinating to
| watch.
|
| On the other hand, the VCs I'm still in touch with seem well
| aware of how this game is played. They still have a lot of
| respect for the top founders and companies coming out of YC,
| but it's also understood that YC is kind of a numbers game
| these days and just getting accepted to YC (or other top
| accelerators) doesn't mean much on its own.
| loceng wrote:
| Reputation boost amongst who, where? You partially answered
| that in that VCs, arguably who you're likely wanting to
| impress with your associations, likely take the YC connection
| with a grain of salt?
| pyb wrote:
| It's a game changer for US companies as well !
| lvl100 wrote:
| Am I the only one who thinks this is a bad deal in 2022? $500K is
| not much and you're effectively giving up a big chunk of your
| equity for reputation and "access".
| mattnewton wrote:
| My impression has always been that you are paying a premium to
| have the YC partners, and their network, spend part of their
| day thinking about how to make your company succeed. That
| "access" seems pretty valuable? I have no idea how to value it
| though.
| R0b0t1 wrote:
| I'm not really sure I could launch a non-SaaS tech company on
| $500k, or rather, if I could, I could just not take their
| money and keep 7%.
| hiptobecubic wrote:
| Well first, "I could just bankroll myself and save 7%!" is
| not how risk management works. Second, the level of
| privilege in this comment is _astounding_. $500k is a lot
| of money if you didn 't grow up elite.
| lvl100 wrote:
| That's not fair and I didn't mean to come across that
| way. But a good portion of people who worked 5-7 years in
| SV (or in other tech hubs such as Boston, NYC,
| Seattle/PDX) have $$$ in the bank.
| R0b0t1 wrote:
| $500k is a lot of money but arguably not enough (for most
| things not strictly SaaS). So either the idea is small
| enough that it seems you don't need $500k and could
| probably bootstrap yourself or you're too big for YC and
| will never happen anyway.
|
| The privilege is assuming that your experience with SWE
| projects maps to everything worth doing.
| ramraj07 wrote:
| This is great news, but is there any special considerations for
| biotech? I have an idea but the minimum investment for a basic
| prototype instrument will itself eat up this money!
| snowmaker wrote:
| (I work with YC's biotech companies). I'm particularly excited
| about what this deal means for biotech companies. YC's previous
| deal of $125K was always a bit light for companies doing wetlab
| biotech, which is still expensive compared to building
| software. $500K is a much better fit for the needs of most new
| biotech companies.
| dang wrote:
| A significant part of how YC thinks about this deal has not yet
| been articulated in the thread. (This is just my personal
| interpretation, not anything official.)
|
| Some comments are describing $500k as "not much". Most people
| would gasp at hearing that. Only a tiny slice of humans are a
| position to think that way--for example, people who have family
| wealth (or maybe an elite educational credential) to fall back
| on, or who have already managed to break into the fundraising
| scene (or maybe a FAANG job) and have gotten used to comparing
| themselves to all the $multimillion deals they keep hearing
| about.
|
| A big part of what YC is about is to be a bridge for _everybody
| else_ to enter this space--no matter who they are or where they
| live or what demographic they belong to. YC has a long track
| record, right from the beginning, of funding founders who never
| would be given a chance by more mainstream institutions [1]. The
| new YC deal is particularly important for these sorts of
| founders. Geoff said it in the post, but I haven 't seen anyone
| pick up on this yet:
|
| _We also hope that this deal will encourage more founders of any
| age and from every demographic group and geographic location to
| take the leap into the startup world._
|
| YC does that because it's in its business interests to do it and
| because it's good for the world. The idea that those two things
| go together, and that the way to maximize them is to help
| founders as much as possible, is in YC's DNA:
| https://www.ycombinator.com/principles/.
|
| Capital-rich climates notwithstanding, many founders are not
| necessarily in a position to step out of YC and raise millions
| right away. Geographic and demographic disadvantages don't
| suddenly disappear. (And let's not forget the disadvantage of
| just working on something weird.) Being in YC helps, of course,
| but all the same imbalances are still in play.
|
| For those founders, YC going from $125k to a $500k deal is a
| gamechanger because it gives them a lot more runway--more time to
| build, to grow, and prove what they can do, before stepping back
| into fundraising. Then they can hopefully raise from a position
| of strength instead of potentially having to accept less
| favorable terms.
|
| [1] Me, for example. I wouldn't be here right now if it weren't
| for that, and I could tell a long story about how most investors
| weren't interested in us even after we got into YC.
| SmellTheGlove wrote:
| > We also hope that this deal will encourage more founders of
| any age and from every demographic group and geographic
| location to take the leap into the startup world.
|
| Again, haven't gone through YC, but this was a topic I raised
| with (IIRC) Kyle and Jared during a Startup School Q&A, from my
| perspective as someone who is a little more senior in my
| career, has a family, but not really the safety net of a prior
| exit or generational wealth to fall back on.
|
| I will tell you that this news had me thinking about my ideas
| again. This would give me the runway to ship an MVP prior to
| having to raise again, which is significant because it means I
| could validate that MVP or decide to do something else.
| Fundraising is distracting and takes time away from building,
| so instead being able to align my personal expense runway with
| startup expense runway would be pretty significant.
|
| As of this moment, I'm thinking about whether my ideas are
| shitty or not between meetings :D
| tabbott wrote:
| Yeah, the change from $125k to $500k is a huge difference.
|
| $500k is enough money for a team with multiple founders who are
| OK with living on a graduate student budget of
| ~$30-40k/person/year (as my friends were, inflation adjusted,
| when we dropped out of graduate school to found Ksplice) to pay
| their expenses for multiple years, and still have plenty of
| money for hardware, hiring people to do specialty work they
| aren't good at, etc.
|
| $125k is not, which means this change is a big shift in what is
| possible for a company raising money only from YC.
|
| What this change means is that it's now more realistic for a
| team without any personal capital to start a startup and then
| bootstrap it from there, without raising capital from anyone
| other than YC (which I believe is experientially pretty
| different from having VC investors). Prior to this
| announcement, the main way to raise that kind of capital
| without angels/VCs on your cap table was the NSF's SBIR
| program.
|
| Due to the selection process, companies accepted into YC
| generally are those that planning to raise a big funding round
| just after Demo Day, but I know a lot of folks who didn't
| succeed in doing so (some of whose companies are still in
| business 10 years later). This change in how much money YC
| offers means that failing to raise a satisfactory round at Demo
| Day does not mean they need to give up -- teams can spend a
| couple years figuring out their business if they think doing so
| is warranted.
|
| (I have no YC affiliation other than having invested in many YC
| companies in the past).
| tabbott wrote:
| Edited to better inflation-adjust what graduate students
| make; it's $30-40K these days :).
| lumost wrote:
| Just wanted to give a shout out for solving a hard tech
| problem with big impact. ksplice eliminated an entire
| person's worth of work at our company back in the day
| giving me enough spare time at work to move into software
| rather than patching servers.
| [deleted]
| jacquesm wrote:
| And increasing the size of the initial funding has the side
| effect of keeping the captable clean and sidelining a lot of
| minor investors that would fill the gap between YC and an
| A-round, which not every YC company achieves by demo day.
| anotherfounder wrote:
| > A big part of what YC is about is to be a bridge for
| everybody else to enter this space--no matter who they are or
| where they live or what demographic they belong to. YC has a
| long track record, right from the beginning, of funding
| founders who never would be given a chance by more mainstream
| institutions
|
| I find this fascinating, maybe as an example of how
| institutions think of themselves and how they are actually
| perceived.
|
| YC feels it is giving outsiders a chance (and that might be
| true for lot of the intl founders YC funds). But for most in
| the US, it seems like YC funds only safe SAAS startups, often
| by founders who were ex-FAANG (or ex-prominent YC startups),
| who are often white, and often MIT/Stanford.
|
| Maybe it's the definition of 'outsider' that differs, but when
| I look around founders who reach out, female and founders of
| color often feel ignored. Consumer founders feel ignored
| compared to enterprise founders.
|
| There are so many stories of founders who are actual outsiders
| (woman/PoC and non-elite schools) who have growing, promising,
| even revenue-generating companies who don't get even an
| interview and yet, other 'insider' founders (white, male, ex-
| FAANG or ex-YC portfolio) who get in on a recently thought of
| high-level idea (and then subsequently pivot a bunch of times
| in the batch).
|
| I say all of this because it worries me if YC already thinks of
| itself as funding those outside the mainstream, that it doesn't
| actually realize who the outsiders are.
| emmett wrote:
| It may "seem" like that to you, but YC publishes actual
| stats...
|
| https://blog.ycombinator.com/yc-summer-2021-batch-stats/
|
| * 50% are based outside the US * 70% are not B2B/Enterprise *
| 43% of the batch is white (less than half)
|
| So...your impression is simply incorrect. YC doesn't fund the
| companies you think it does.
| dang wrote:
| Sure, perceptions differ, especially from different points of
| view. People at YC put a ton of effort into what I've
| described. Is a lot more needed? Of course. They'd be the
| first to agree with you about that. That doesn't mean the
| efforts to date aren't worth anything, though; let's not fall
| into being binary about this. Nor does it change the point
| about the differential impact of a $500k deal, for those who
| do get funded and don't have external resources to fall back
| on.
|
| > _But for most in the US, it seems like YC funds only
| [etc.]._
|
| That's far from accurate, and I don't think it's very helpful
| to say "for most in the US". Surely only a small minority in
| the US have even heard of YC.
| bambax wrote:
| A way to know would be to publish statistics.
| infamia wrote:
| > That's far from accurate, and I don't think it's very
| helpful to say "for most in the US". Surely only a small
| minority in the US have even heard of YC.
|
| I read the parent's statement as (brackets are mine), "But
| for most in the US [startup community], it seems like YC
| funds only safe SAAS startups, often by founders who were
| ex-FAANG (or ex-prominent YC startups), who are often
| white, and often MIT/Stanford."
| jedwhite wrote:
| Even a friendly fundraising round is a big time sink. This lets
| early-stage startups focus their energy on building rather than
| fundraising, especially for harder tech. $500k is enough to
| feel like you can do anything, but not so much that you don't
| have to.
| ensemblehq wrote:
| This is indeed a huge game changer especially for founders who
| are already within industry and are earning a lot more than a
| new grad's salary. It also affords startups much stronger
| talent early on and iterate on ideas with higher capital
| requirements. Looking forward to what's coming through the YC
| pipeline!
| pyb wrote:
| Would YC have to shrink the batches to implement this change?
| nkotov wrote:
| This is such a good change. Fundraising is such a time sink for
| founders that it takes time away from everything else that
| matters. I went through YC in S20 and only raised $500k and that
| helped our team go through without the need for additional
| funding for almost two years.
| yaseer wrote:
| YC was a no-brainer value-add for us, even without this deal.
|
| It's still a no-brainer for any founder, regardless of batch size
| or remote vs in-person. This new deal simply cements that.
|
| Well done to the YC team.
| 762236 wrote:
| Apparently it isn't no brainer, since I don't understand what
| is the benefit received for 7% of the company. Could you
| explain?
| exolymph wrote:
| The money is helpful if you're close to seed stage, but the
| network and brand cachet are invaluable. For example,
| recruiting is crucial for early-stage startups, and it is
| MUCH easier to recruit high-level talent (and get them to
| accept more equity in lieu of more cash) when you have a
| name-brand VC committed.
| skeeter2020 wrote:
| >> brand cachet are invaluable.
|
| This was much more a value when there was only a handful of
| companies in each cohort. Now there's 3 groups:
|
| * YC~low number~ that I've heard of: Original signalling
| value
|
| * YC~low number~ that I've never heard of: zombie
|
| * YC~high number~ : new batch of spray and pray
|
| This is unfair but my initial reaction
| pyb wrote:
| You get 500k investment, and you get to participate in the YC
| accelerator.
| swyx wrote:
| well, i mean, if you can raise externally at a $35m valuation
| (current top of market for early stage) and you go into YC for
| $2m, you* may be the one without a brain, not YC.
|
| *you in the general sense, not you specifically :)
| devy wrote:
| The amount of money that's flowing into the VC since the pandemic
| is insane! [1] Thanks to Fed's unlimited QE, investors can borrow
| almost free cash from the feds and pour them into the VC funds
| for investments. Great times to be an entrepreneur! However, this
| reminds me of the dot com bubble years. When is this going to
| end? A lot scary to think about the consequences if that were to
| happen...
|
| [1]: https://news.ycombinator.com/item?id=29880132
| itsoktocry wrote:
| > _Thanks to Fed 's unlimited QE, investors can borrow almost
| free cash from the feds and pour them into the VC funds for
| investments._
|
| Yes, there is a surplus of capital (and has been for a few
| years), so it's cheap. No, there isn't unlimited QE, and no
| investors are borrowing from the Fed.
| robocat wrote:
| > no investors are borrowing from the Fed.
|
| Some of the borrowing is indirect.
|
| Let's say you have a portfolio that includes property.
| Inflation is high and the current 15 year interest rates are
| low, so you might increase your mortgage to the maximum. You
| then put that money into other investments, including VC.
|
| This opportunity is even available to many home owners in the
| US.
| gjs278 wrote:
| scottiebarnes wrote:
| > No, there isn't unlimited QE
|
| Well there certainly isn't any explicit limit either.
| kevinventullo wrote:
| I think I have a pretty good idea of exactly which sub-sector
| of Tech right now is most likely to be a bubble...
| [deleted]
| lifeisstillgood wrote:
| Going by my memory, when YC started they invested 5K per founder.
| It was, either by accident or design, focused on 20-somethings
| eating ramen and dreaming big. You could not do much else on 5K.
|
| There may have been many (myself included) who thought "give up a
| cushty job, and even if I get in, don't get back much more than
| the cost of flights to Boston"
|
| Does this signal that its harder to find those young hungry
| geniuses? Or that other stages of life are now predominating?
|
| I would be fascinated to see a demographic breakdown of YC / SV
| founders ...
|
| Edit: the thing is it breaks my clever idea of A Million
| Startups. So i had a clever idea a while back, (I think when
| Softbank wrote off 10BN?). 10BN is about the right amount to fund
| a million startups. 100K in India, 100K in SE Asia etc etc. You
| could assume a 50% fail rate at each "stage" and put in 5K to
| each of a million startups, and then 2.5BN, then 1.5BN etc etc. I
| am not sure what kicking off a million bright young things would
| do to the world, but I think it is a worthwhile way to waste 10BN
| pclark wrote:
| I think its a common misconception that YC primarily invests in
| 20-somethings eating ramen and dreaming big. Lots of YC
| founders have kids and stuff. This was true when I went through
| in YC in 2011 (interestingly first batch that got $250k from
| Yuri Milner) and doubly true when I just went through in 2021.
|
| I'm skeptical the goal of this is to encourage high salaried
| people to start companies though, it's probably just to give
| people extended runway.
| PragmaticPulp wrote:
| > Does this signal that its harder to find those young hungry
| geniuses? Or that other stages of life are now predominating?
|
| It's much, much easier to get a high paying tech job now than
| it was back then. Assuming you're ambitious and willing to
| relocate, you can now go to Silicon Valley, make all of the
| right moves, and amass millions of dollars in a decade of
| working for the right companies.
|
| Making that kind of money with that kind of point-and-shoot
| career process (not easy, but doable for kinds of ambitious
| engineers considering startup life) wasn't nearly as easy a
| couple decades ago. If you wanted to really accomplish
| something and make it big, it felt like a startup was the right
| kind of gamble.
|
| Products were also easier to ship back then. 37Signals (now
| Basecamp) built a highly profitable empire on top of software
| that was basically a bunch of web forms. A couple founders
| eating ramen could very easily launch a new web product back
| then. Now it's tough to get recognized without polished UX,
| flawless features, and a significant customer acquisition
| budget. It's easy to forget just how much technology and the
| industry have changed in recent years.
| onlyrealcuzzo wrote:
| > Assuming you're ambitious and willing to relocate, you can
| now go to Silicon Valley, make all of the right moves, and
| amass millions of dollars in a decade of working for the
| right companies
|
| It's quite easy to do it in 4 years or less now.
|
| At current pay rates and stock growth rates, you have to be
| VERY optimistic to turn down a FAANG job.
| hemloc_io wrote:
| Yep and you also can learn to deliver products at scale.
|
| For me the main reason I took a FAANG job was to get enough
| money that I can chill for a couple years and build a
| failed startup ;). (And hopefully meet many smart people
| work with on it.)
| sarma912 wrote:
| Millions in 4 years? Damn, can you give me a rough
| calculation on how this happens?
| MikeTheRocker wrote:
| As an example, IC5 engineers (~5+ years of experience)
| can realistically earn $350-450k USD per year at Meta
| these days.
|
| Disclaimer: I work at Meta
| onlyrealcuzzo wrote:
| You could also do this at IC4 / L4 at Google - depending
| on how good your initial grant was. Appreciation has been
| high.
| sarma912 wrote:
| I'm an L6 at Amazon and I'm not sure if millions are
| possible in 4 years, but the replies are right in that
| you get close to a million. RSUs, investing back into the
| socket market etc etc gets you there.
| lostmsu wrote:
| Senior offers from Facebook in Seattle are nearing
| $500k/y total comp.
| madars wrote:
| But that doesn't get you to millions (plural, post-tax)
| in 4 years...
| onlyrealcuzzo wrote:
| Depending on your spending and your return on
| investments, it easily could have in the last 4 years...
|
| House prices (on 5:1 leverage) are up >100% THIS YEAR.
|
| The S&P is up ~30%.
|
| You need a ~20% return saving ~$300k per year to get >$2M
| in 4 years. This wasn't terribly difficult to get in the
| last 4 years.
|
| Who knows what the future will bring.
| ricardobayes wrote:
| That's very much true, even though I had an exit, if I
| could turn back the wheels of time, I would have spent a
| few years in a FAANG job. Way less stressful and you (can)
| have exposure to startup culture anyway there.
| majani wrote:
| Yup, nowadays I see most MVPs and at first glance I am amazed
| at the quality. Back in the day, a well put together MVP was
| probably enough to make your product go viral
| ricardobayes wrote:
| That depends heavily on the product, but yeah it's true.
| Also what I see is teams are getting better at focusing on
| their core value and stripping away unnecessary things at
| the beginning.
| legostormtroopr wrote:
| > A couple founders eating ramen could very easily launch a
| new web product back then. Now it's tough to get recognized
|
| The competition was signficantly lower back then as well. Not
| only is all of the low hanging fruit gone, but those start
| ups who made it are now the current behemoth incumbents and
| are trying to clean up the whole orchard (so to speak).
| fdgsdfogijq wrote:
| The overall value of a software engineer is higher now than
| in the past. I think companies recognize this and are paying
| for it. An engineer that builds a system that controls 1000
| machines in some distributed system, that serves content to
| 100 million people has massive leverage, and is worth paying
| an extra few hundred grand.
| PragmaticPulp wrote:
| > An engineer that builds a system that controls 1000
| machines in some distributed system, that serves content to
| 100 million people has massive leverage
|
| The idea of individual engineers shipping services on their
| own is long gone, though. Big companies have an almost
| unthinkably large army of engineers working on everything
| these days. It's never just one person doing the magic that
| makes a service go. OTOH, decades ago it wasn't too
| uncommon to find just a couple key engineers at the helm of
| key services.
|
| I think the real driver is the amount of money pouring into
| the tech space. Companies have to pay more to compete with
| each other for talent because there are so many tech
| companies trying to do tech things now. It's as simple as
| that.
| fdgsdfogijq wrote:
| Right, but the market caps have gone up so much. If you
| run some basic metric like market cap/number of
| engineers, places like facebook have an insane incentive
| to pay huge money for talent. The relative scope may have
| gone down (many people on one project/api), but the wide
| ranging impact on PnL/Profitability/Money generated by
| those individual engineers changes have gone up
| spamizbad wrote:
| Yeah, looking back to the mid-aughts you could probably
| "launch" a "product" in a few weeks. You could stretch that
| 5K into a few months of runway as your expenses are rent,
| food, internet, and maybe $150/month tops in SaaS stuff.
|
| Like you said, it was also easier to find people who wanted
| to work on that stuff. Tech jobs were less kushy and highly
| paid. Working at that kind of startup was a dream compared to
| slogging through crufty code at some company where software
| was viewed as a cost - rather than profit - center. But I
| think back then market rate for a mid-level dev was something
| like 70K.
| MattGaiser wrote:
| Now companies seem to be in stealth for years.
| ricardobayes wrote:
| True, partially I think because there's more founders
| nowadays with exits behind them and can bankroll an
| operation for years.
| cjameskeller wrote:
| I wonder if this kind of program could/has attracted any
| interest from the Effective Altruism folks?
| netcan wrote:
| Lots and lots of things are different now.
|
| Salary prospects, for the people they want to fund. Competition
| from other investors. The follow on ecosystem of investors.
|
| Also the startup opportunities of 2022 Vs 2007.... both "real"
| differences and differences in belief about said opportunities.
|
| Airbnb, Reddit and such were websites that a clever, motivated
| 19 year old could build and launch in short time. There are
| fewer of these opportunities now, and mor opportunities at
| heavier scale.
| maerF0x0 wrote:
| in addition to what you said, there is also more global
| competition for startups. YC has to compete with other cities
| top incubators on a CoL adjusted opportunity cost. and the
| bay area is one of (or the) most expensive spot.
| echelon wrote:
| I'm also really curious about their bets and the data. I
| thought the market was starting to cater to older, more
| experienced founders?
|
| That's been adjusted up so that YC invests $125,000 for 7%. It
| still feels really low these days.
|
| I've heard of VC firms investing 3-5 million for 10-20% in
| seed/series A with no seed [1, 2], which seems like a much
| better deal. Lots of room for growth before giving up more
| equity.
|
| Which VC firms are investing like this, and how do you connect
| with them if you're outside the bay area but already have a
| product with significant growth?
|
| Or, contrary to this, does YC offer value beyond monetary that
| makes the investment worth more than the alternatives?
|
| [1]
| https://web.archive.org/web/20200817011057/http://www.apollo...
|
| [2] https://news.crunchbase.com/news/seed-funding-startups-
| top-v...
| nostrademons wrote:
| The industry has changed. In 2005 the hot growth industry was
| the web, particular the social and sharing economy parts of it.
| These favor changes in consumer behavior, which young
| 20-somethings are particularly tapped into because their peers
| are often the ones driving the change. You could found a $100B
| company as a pair of early 20-somethings learning brand new
| tech and riding the beginning of some social wave.
|
| Now - outside of crypto - most of the exciting untapped markets
| in tech are in:
|
| a.) hardware, where you have bill-of-materials and contract
| manufacturing cost and everything takes longer to get off the
| ground
|
| b.) hard sciences like fusion or satellites or aerospace, where
| you need a Ph.D and often some research experience to make
| progress (plus you have super high manufacturing costs)
|
| c.) SaaS, where it helps to have deep knowledge of an industry
| so you've got those connections, understand all the internal
| processes of your customers, and can penetrate those sales
| processes.
|
| All of these select for older founders and more capital
| requirements. I think the spray-and-pray approach for funding
| low-capital web startups isn't really viable in 2022, because
| consumers aren't just visiting any website or downloading any
| app that becomes hot.
| Alex3917 wrote:
| > Going by my memory, when YC started they invested 5K per
| founder.
|
| It was originally 5k plus 5k per founder. The first time it
| changed was summer 2011, with the guaranteed additional 150k
| funding from Yuri Milner and Ron Conway.
|
| source: https://www.newsweek.com/boot-camp-next-tech-
| billionaires-10...
|
| https://venturebeat.com/2011/01/29/yuri-milner-and-ron-conwa...
| livinglist wrote:
| thank u for this
| newsclues wrote:
| Most low hanging fruit has been picked.
| lupire wrote:
| The short article clearly states that YC is now wealthy enough
| to pay founders more of what they need to survive, and to edge
| out other investors offering this critical funding.
| ricardobayes wrote:
| From what I see around me, people with little to no 'real-life'
| experience rarely make it in startup world. On the contrary,
| people with proven track record in an industry have a jolly
| great time fundraising and building companies. That's just my
| experience, also I am a good few years older when I was doing
| the 'ramen and think big' thing.
| wayoutthere wrote:
| In my mind, it's a signal that we've solved all the problems
| capable of being solved by a hungry person with little
| experience in the problem space. The problem space that's left
| is in places that require a significant amount of expertise to
| be able to even spot an opportunity, and the cost of developing
| products to address those spaces is much higher since there are
| ample opportunities to become a millionaire through just
| working for a big tech company.
|
| The tech product world is just more mature, and more mature
| leaders and developers are required as a result.
| solaarphunk wrote:
| YC is trying to buy more pro rata with this deal, which is what a
| ton of YC founders complain about in later rounds. This will make
| things worse.
| dalton wrote:
| Hi there - this is not a pro-rata investment, we are investing
| this 375K right away
| solaarphunk wrote:
| I understand that it's invested right away, but it buys you
| more pro rata in future rounds than founders currently give
| up to YC under the deal.
| tnorthcutt wrote:
| I'm not very familiar with VC funding/equity structures; would
| you mind expanding on this?
| gringoDan wrote:
| Not OP, but in one sentence: YC will give you an additional
| $375k now, in exchange for the promise to give them equity at
| the same terms you give other investors when you raise your
| next round of funding.
|
| The criticism here is that you need to give up a higher % of
| your company down the road.
| lupire wrote:
| How so? Because later investors _force_ more cash than
| founders need?
| pipnonsense wrote:
| What is the effect of this on Demo Day? Is Demo Day less relevant
| (since lean companies might just skip it)? Isn't the Demo Day a
| motivational deadline that adds value to the YC experience, so it
| reduces the weight of the "acceleration" part of the program?
|
| I don't know those answers, just wondering in the hope that
| someone from YC comments on that.
| aerosmile wrote:
| Founders will sometimes say "if I can't build this company with
| no more than a million dollars, it's not worth building it at
| all." In isolation, that thinking may not be wrong, since it
| highlights the importance of frugality and the product market
| fit. But in connection with the easiest influx of capital you
| will ever experience in the lifecycle of your company, paired
| with valuations that are super high on a risk-adjusted basis,
| it would be insane not to say yes to a war chest of a few
| million dollars that you put away for the rainy day.
|
| So no, I don't think that YC companies will raise any less, or
| will be any less concerned about being ready for Demo Day. The
| one thing that might happen is that the earliest investors will
| see a hike in valuations. In the past, investors with the
| strongest value add (reputation/brand/connections/etc) were
| able to get in a few weeks before Demo Day at a discount. Since
| Demo Day investments are characterized by a very weak signal-
| to-noise ratio, knowing that a reputable investor is bullish on
| a startup tends to increase the demand to such an extend that
| the resulting higher valuation more than makes up for that
| initial discount.
|
| Now that this additional $500k is going to be valued against
| the lowest valuation, it will increase the barrier for giving
| discounted deals.
| herval wrote:
| > Founders will sometimes say "if I can't build this company
| with no more than a million dollars, it's not worth building
| it at all."
|
| I feel like this became such a big meme, that it actually
| hurt innovation. With lots of founders (me included) adopting
| the "Lean Startup" mindset, it's much easier to build a
| "single-feature company" that does something slightly
| mundane, then get acquired/acquihired because what you're
| doing is just so easy to reproduce. In my mind, that explains
| why most Unicorns these days are stuff like debit cards for
| companies, yet another task manager or note taking app, etc.
|
| tl;dr I think true innovation requires [capital & research &
| time], and feel like we've replaced that pyramid with [quick
| iteration & extreme scrappiness & failing fast], maybe a bit
| too much.
| snowmaker wrote:
| Most companies in YC these days raise over $1M at demo day, so
| no, I don't think many companies are likely to skip demo day as
| a result of this.
|
| Our goal instead is to make companies more successful at demo
| day. Now they'll have more capital to use to grow during the
| batch, and they'll have more leverage to negotiate with demo
| day investors because they are better capitalized going into
| their fundraise.
| ryanSrich wrote:
| I don't think this has any real impact on Demo Day. Seed rounds
| have inflated so dramatically at this point that $500k is just
| a drop in the bucket. Most venture scale companies (which if
| you're in YC you most likely are) are raising $3-$5m seed, and
| then $10-$20m Series A. Of course, this is pushing valuations
| to astronomical levels.
| pyb wrote:
| That looks like an incredibly founder-friendly deal, and such a
| huge change wrt the current YC offer !
| cedricd wrote:
| I'd be curious to see if YC founders, for whatever reason, are
| able to choose to opt out of the 375.
|
| Overall I think this is a great move, and it's good for founders
| going through the batch. But they could have reasons to not want
| to give more equity to YC (maybe have more room in SAFEs for
| strategic angels, stuff like that).
|
| edit: I originally called 'more equity' pro rata, which is not
| correct at all.
| ketzo wrote:
| Just as a point of technicality, this is _not_ pro rata for YC,
| right?
|
| > a pro rata clause in an investment agreement gives the
| investor a right (but not the obligation) to participate in one
| or more future financing rounds _to maintain their percentage
| stake_ in the company.
|
| This deal explicitly says "hey, here's 375k; we'll take
| _whatever share of your company that is_ next time you raise. "
| That's not maintaining percentage stake; it's actually agreeing
| to the possibility of a fairly small stake.
| cedricd wrote:
| That's true. I wasn't sure what else to call it. I guess it's
| more investment upfront at a later valuation. It's almost
| like a SAFE where the next SAFE acts like a priced round.
|
| It's a non-trivial amount though -- it's probably the case
| that the next funding round for most YC companies gets low
| millions. So that's a nice chunk of the round.
|
| Getting it upfront is unique though, and really quite
| valuable at this early stage. Still curious if YC will allow
| opting out -- I don't think I would have -- but still
| curious.
| sgt wrote:
| Out of interest sake, how much importance does YC place on
| actually having existing users (not necessarily a lot of revenue,
| but hundreds of users) as opposed to not? It sounds like a non-
| brainer question but YC is a bit different than other funds.
| 11thEarlOfMar wrote:
| From YC's perspective, it's protection against dilution at the
| 2nd round.
|
| Also shows additional confidence in selecting a winning cohort.
| [deleted]
| everhard_ wrote:
| MFN Clause: In a most favored nation (MFN) clause, if subsequent
| convertible securities are issued to future investors at better
| terms (e.g., a lower valuation cap), the better terms will
| automatically apply to the investor's SAFE. This clause falls
| away on conversion of the SAFE into company stock.
| vmception wrote:
| who makes up these clause names?
|
| are these procedurally generated by a professor at Stanford who
| masquerades it as an industry term during the latest semester?
|
| the show Silicon Valley has a few jokes about that
| jandrewrogers wrote:
| MFN, at least, is a standard and common term-of-art in
| contracts and can apply to all kinds of things where a party
| wants to guarantee that no one else gets a better deal.
| vmception wrote:
| > is a standard and common term-of-art in contracts
|
| the reason this isn't exactly helpful is because everyone
| says that about everything contract related. thats the user
| experience of being presented a contract whether it is true
| or not.
|
| got a list? is there a document on clause etymology?
| Turing_Machine wrote:
| I'm pretty sure that the "most favored nation" term goes
| back to international tariffs.
|
| Among the nations your nation trades with, some are your
| "customs buddies" (not a real term :-)), for whatever
| reason -- there's a lot of reciprocal trade, you're
| allies in war, the other nation is scary enough to shake
| you down... Those nations get lower customs rates. The
| nations that get the best rates are the "most favored
| nations". When countries negotiate new trade agreements,
| a common demand is for "most favored nation status",
| i.e., that you won't charge them any more than the lowest
| rate you charge the "most favored" country.
| vmception wrote:
| is there a list or document on clause etymology?
|
| its not really about just the MFN explanation anymore,
| thanks for the one potential synopsis on that particular
| concept
| throwawaybbqed wrote:
| What is a SAFE? Any newbie reads? I got the 7% equity part, but
| some examples could be useful for the code monks amongst us.
| feross wrote:
| This video "Understanding SAFEs and Priced Equity Rounds"
| from YC is a great resource:
| https://www.ycombinator.com/library/6m-understanding-
| safes-a...
| sokoloff wrote:
| It's a home-cooking (but I think accurate and clear)
| description: https://www.ycombinator.com/documents/
| devmunchies wrote:
| Basically a contract that the investor will give you money
| now and be given equity in the next financing round in the
| future.
|
| S.A.F.E = Simple agreement for future equity
|
| It's like a "preorder for investors"
| vl wrote:
| The best thing to do is to actually read SAFE templates, they
| are self-explanatory. Pretty much now these are standard
| instruments for early-stage investing for everyone, not only
| YC, so investor or founder you'll see them a lot.
|
| https://www.ycombinator.com/documents/
| fourseventy wrote:
| Its a Simple Agreement to Future Equity. It's a fundraising
| instrument where the investor agrees to give the company
| money in exchange for some amount of equity to be decided at
| a future date. It's designed to make it easier for founders
| to get capital at the early stages without having to
| negotiate valuation.
| dlevine wrote:
| Prior to the SAFE, a lot of startups raised using convertible
| debt, which had a bunch of strings attached (convertible
| notes typically have an interest rate, a cap, and a
| discount). SAFE was an attempt to make this simpler and more
| founder friendly.
| sokoloff wrote:
| This seems crazy, crazy good for founders (and difficult for many
| other incubators to match).
| peterhunt wrote:
| You think? I actually have the opposite impression. This takes
| away control from the founders and makes it harder to precisely
| control dilution, which is very important at the early stages.
| freeqaz wrote:
| A SAFE without a cap is nice though for an early company,
| especially if it's optional. A SAFE like this means that
| you're effectively raising at a Series A valuation but during
| your pre-seed stage. The most obvious effect of this to me is
| that it will gives your Series A investors a little less,
| either that or you'll take more dilution at Series A if your
| investors won't budge. Is that what you mean by "precisily
| controlling dilution"?
|
| That's counteracted, fortunately, because at the current
| valuations that many companies are raising a Series A at,
| $375k isn't a big hit. (I've seen Series As from 20m up to
| 150m these days)
|
| What I see as the major upside here is: Companies gain the
| ability to take a little less $ when raising pre-seed/seed
| SAFEs with harsher restrictions. Most SAFEs at that stage
| have some sort of investor incentive either as a "valuation
| cap" or a "discount" (at least the standard YC SAFEs[0]). For
| many companies, at least pre-pandemic, these caps were
| usually around $10-15m post-money (you raise $1m at $10m
| post-money, your investors get 10%, so you're saying your
| company is worth $9m).
|
| Of course, SAFEs can screw you too if you don't hit your
| valuation goals. So YCs $375k SAFE, if you have to raise a
| Series A at a low valuation, will hurt you more because you
| might have specific $ goals in mind that you can't budge on.
| But, at least having an extra $375k early on will help more
| companies, on average, avoid these "Series A downrounds" more
| frequently by giving them more runway.
|
| There is always going to be pros/cons when raising
| investment. At least with this, I feel like this makes the
| world a little more founder-friendly for early stage
| companies. Is my take approximately in-line with what you're
| thinking?
|
| 0: https://www.ycombinator.com/documents/
| tptacek wrote:
| If you're looking for such fine-grained control over dilution
| that $500k is an untenable amount of cash to take vs.
| whatever YC was paying before, you might just want to skip
| YC.
| dqpb wrote:
| Is it just me or is $125k for 7% a terrible deal? Is the idea
| that the networking perks make up for it?
| sandruso wrote:
| Money is only one aspect of the deal. There is wide network of
| existing companies, investors, etc. Value of these varies
| according to type of the company.
| lpolovets wrote:
| Pretty interesting move. Great for founders raising seed rounds
| after YC. Great for YC. Not sure if it's as great for founders
| who want to raise a little at a pre-seed price (e.g. $1m at $10m
| post) because now there's $375k extra converting at whatever
| valuation you raise at.
| pyb wrote:
| BTW, is YC going to open up their early application process this
| month?
| sandslash wrote:
| We'll be announcing the early application process for S22 soon!
| arrel wrote:
| Didn't YC already try this with Yuri Milner ten or so years ago?
| From what I remember they canceled it because it was creating
| zombie companies, where the founders felt like they couldn't give
| up on a bad idea because they still had so much runway.
| tabbott wrote:
| I have no inside information on this but I think it may have
| had more to do with concerns about whether they wanted to be
| encouraging every YC company to take Yuri Milner's money. See
| e.g.:
|
| https://www.nytimes.com/2017/11/05/world/yuri-milner-faceboo...
|
| Also the total funds at the time was ~$150K, aka roughly what
| YC was doing before this announcement:
| https://techcrunch.com/2011/01/28/yuri-milner-sv-angel-offer...
|
| (I believe the history is that at the time, YC didn't have the
| free cash flow themselves to invest in every YC startup).
| Liron wrote:
| I'm confident that the Ron Conway / Yuri Milner "Start Fund"
| idea worked out great financially, although I think one
| difference is that it was optional while this new deal is
| mandatory, so there might have been a significant selection
| effect (positive or negative), e.g. I'm not sure if Coinbase
| (YC S12) took the deal and that would matter a lot to the
| returns.
| vl wrote:
| Inflation?
| ketzo wrote:
| Not exactly, although clearly this is in _some_ part a reaction
| to the kind of insane amount of VC sloshing around.
|
| They're not offering "more money for the same thing" (i.e.
| inflation).
|
| Instead, YC is offering its old deal - 125k for 7% - _plus_ a
| bunch more up-front cash for a (to my eyes) very reasonable
| adjustable equity stake to be named later.
| igammarays wrote:
| Question for YC: if a solo founder fully intends never to take
| additional funding after YC, is that considered defrauding YC (or
| at least a bad faith application)? I thought YC only invests in
| companies which it expects to go "VC-scale big", i.e. multiple
| series of follow-on funding to hit $100M+ annual revenue targets
| and huge teams?
| sjroot wrote:
| I've been in this position myself. To be fair, you aren't
| bootstrapping if you're taking YC funds, right?
|
| They are seeking returns on this investment in the magnitude
| seen in previous YC company IPOs, as mentioned in the article.
| Is a bootstrapped company likely to have that outcome?
| Possibly, but much less likely than those that have swelled
| with additional funding rounds and more rapid/predictable
| public interest.
| igammarays wrote:
| Exactly, so if I apply to YC while intending to go big, but
| not raise additional funding rounds, am I defrauding them
| with a bad-faith application?
| Kevin_S wrote:
| Surely not. If you don't raise another round, YC may just
| write off this as a cost of doing business (similar to
| failed startups they've invested).
|
| It may be written into the terms some other backup for this
| situation.
| ketzo wrote:
| This is a super valid question that I have seen asked multiple
| times with no clear answer.
|
| I don't really care what YC is expecting; I think that is
| already extremely clear. They're _expecting_ VC unicorns.
|
| The question is what is legal, and what would be breach-of-
| contract or fraud? I think the answer to those questions 1)
| probably should not come from an internet forum comment 2)
| requires the actual documents in question.
| snowmaker wrote:
| No. There is no requirement (or implied requirement) to raise
| more money after doing YC.
| 0xB31B1B wrote:
| Seems like a step in the right direction here. 125k for 7% is
| still extremely steep in todays market.
| sudhirj wrote:
| Steep as in it's too cheap? If you get into YC they're
| instantly valuing your company at over $1.7 million, which
| seems very founder friendly to me.
| OnlineGladiator wrote:
| I think YC is great for founders (I actually went through a
| batch many years ago), but it's worth mentioning many of the
| startups are not really that early. Some were going straight
| to an A round instead of a seed round, many (maybe most) had
| already raised money, some had already raised money at
| significantly higher valuations.
|
| The advice I give to 99% of people is if you get into YC you
| should definitely do it, but the valuation is not necessarily
| high.
| sudhirj wrote:
| Do companies that already have millions in revenue (or feel
| that's inevitable) get the same terms? It would be
| interesting to see who accepts that -- they probably see
| something worth it in YC to give a discount on equity.
| OnlineGladiator wrote:
| I went through YC years ago so maybe it's changed, but at
| the time I think it was ~1 company per batch would get
| better terms. In other words, it wasn't negotiable. This
| wasn't baked in, their stance was "we don't negotiate"
| and only in truly extraordinary cases would they make an
| exception.
|
| The reason to go through YC is, quite simply, they will
| increase the value of your company by significantly more
| than 7%. If you don't believe they can add that much
| value, then you shouldn't do it. There aren't many people
| who don't think YC can add that though, just the
| valuation bump you'll get while fundraising is
| significantly greater. And on top of that they really do
| a great job of actually helping you, which alone is worth
| the 7% in my opinion.
| lleims wrote:
| They're still going to get 7% for $125k. The $375k extra will
| convert on the same terms of the next financing.
| throw1234651234 wrote:
| 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.
| sokoloff wrote:
| 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.)
| vl wrote:
| In practice for small round you will be raising SAFEs
| instead anyway, so it might be fine for early companies.
| istinetz wrote:
| 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.
| lmeyerov wrote:
| It took me a second to work through. Basically, they just said
| they will always do some of their effective pro rata. So more
| weight on the cap table. Hopefully it isn't required, bc
| sometimes there isn't a lot of room, and their value goes down
| the further out you are. But for weaker companies, for helping
| their rounds kick off, can be good.
| dannyw wrote:
| Nope. They still retain their perpetual, unlimited 4% pro
| rata in addition to the 375k most favorable note.
|
| This is extra pro rata.
| lmeyerov wrote:
| Yep, and apparently forced bc they give the $ on day 1.
| That's a lot of %, and before most founders understand what
| is happening, esp. in their target demographic....
| yawnxyz wrote:
| that's interesting- we decided to take around that figure in
| non-dilutive grant funding instead of YC. Compared to grants,
| that's pretty expensive
| scottiebarnes wrote:
| Can anyone list the 10 IPOs of 2021 that were YC companies?
| legutierr wrote:
| Does anyone know if YC has published a model version of the
| "uncapped safe with an MFN" mentioned in the blog post?
| Finbarr wrote:
| Very curious to see what kind of pricing pressure this puts on
| seed investors who traditionally invest after YC. The dynamics
| seem likely to swing even more in favor of founders.
| amirhirsch wrote:
| Yea I was thinking this too. A reasonable startup is talking to
| other investors besides YC when they apply, so those investors
| will have to make up their mind before you get in or they will
| have to accept the same MFN note after
| blast wrote:
| > The dynamics seem likely to swing even more in favor of
| founders.
|
| What makes you say that?
| colinmhayes wrote:
| They can wait longer before seeking funding. And since the
| terms for the 375k are based off the first funding round it
| makes sense to wait until the last second to minimize the
| percentage that goes to yc.
| Finbarr wrote:
| There isn't the same pressure on founders to raise a seed
| round as they are likely to exit YC with significant capital
| and runway. Seed investors still have capital allocation
| targets and are likely to improve their offers to encourage
| founders to accept investment.
| tmcneal wrote:
| This also incentivizes founders to raise at a higher cap to
| minimize the dilution from the $375k. I imagine it'll be
| harder for investors to negotiate a lower cap or get a
| discount.
| smashah wrote:
| Meanwhile in London founders are expected to take PS6k at > 0%
| dzonga wrote:
| which london accelerator gives startups 6k ? unless it's a
| wannabe accelerator
| [deleted]
| daolf wrote:
| So what happens to the $375k if you don't raise after YC?
|
| Let's say you exit 1 year after YC at a $5m valuation
|
| With the MFN, does that mean that YC get 28% of the sale instead
| of the initial 7%?
| jonathanpeterwu wrote:
| That seems to be the suggestion with MFN, it gets priced at the
| lowest term sheet so in this case the sale term sheet
| rexreed wrote:
| I posed the exact question here and got the non-answer that an
| unconverted SAFE is just debt, but it's not just debt.
|
| My understanding is that the valuation is not meaningful on an
| uncapped SAFE where there's no subsequent round. So 7% equity
| is what they have regardless of a $5M valuation as determined
| by... who?
| jeff18 wrote:
| My understanding is that YC would get 7% ($350k) and would
| also receive $375k from this new SAFE. So YC would have put
| in $500k and gotten $675k back.
| jayzalowitz wrote:
| I hate this.
|
| Can they update the MFN to post YC acceptance date?
|
| If I take early money I now have to give YC a super good deal
| too.
|
| Incentivizes not raising money before YC.
| emmett wrote:
| That's not what the SAFE says. It's only on subsequent
| securities, not prior ones.
|
| "If the Company issues any Subsequent Convertible Securities
| with terms more favorable than those of this Safe (including,
| without limitation, a valuation cap and/or discount) prior to
| termination of this Safe, the Company will promptly provide the
| Investor with written notice thereof, together with a copy of
| such Subsequent Convertible Securities (the "MFN Notice") and,
| upon written request of the Investor, any additional
| information related to such Subsequent Convertible Securities
| as may be reasonably requested by the Investor."
|
| https://www.ycombinator.com/documents/
| whiddershins wrote:
| It's on your next round.
| robertlagrant wrote:
| This is a great step forward, particularly for countries with low
| costs of living. However, here in the UK where costs are
| reasonably high, I would think it wouldn't give a lot of room for
| working before needing to re-raise. Are there any good strategies
| for this?
| nrmitchi wrote:
| I *think* that this is overall a good thing, but does it not
| implicitly create a floor for what a future funding round would
| be able to raise at?
|
| My basic back-of-the-envelope math looks like this makes raising
| a future round at anything < 5M pretty impractical? This obvious
| doesn't affect the big-wins from YC (at which point the
| additional equity from the 375k is likely trivial anyways).
|
| I know that YC (like any VC) is really betting on it's unicorn
| outliers for it's returns, and this is likely a big win for
| middle-of-the-pack companies as well, but could easily lead to
| many "smaller" outcomes being unable to raise and forced to shut
| down, no?
| freeqaz wrote:
| I definitely agree with you here. If you aren't doing so hot
| and you have to raise at a low valuation with an extra $375k to
| "convert" at that low valuation, then you'll be hit with a ton
| of dilution.
|
| Fortunately, I think this is balanced by the fact that it will
| give more runway to companies before they have to deal with
| that, so hopefully more companies can move towards the "middle
| of the pack" tier before being eaten. (And to be quite frank,
| if you have YC on your investor list, there are many investors
| that are happy to invest in you just because of that. You're
| likely already "middle of the pack" just by virtue of that.)
| nrmitchi wrote:
| > Fortunately, I think this is balanced by the fact that it
| will give more runway to companies before they have to deal
| with that
|
| Complete agree, which is why I'm leaning in favor of it being
| a good thing. If the funds weren't available immediately it
| would be a different story.
|
| > You're likely already "middle of the pack" just by virtue
| of that
|
| I also agree with this, but I think we're using different
| definitions. I meant "middle of the YC pack", which isn't the
| same as "middle of the start up pack".
|
| Either way, I still think this change is going to (note that
| all percentages are guesstimated):
|
| - Have minimal impact to the top 5% of YC companies that
| raise (relatively) huge follow-on rounds - Be a slight
| consideration for the "middle" 50% of YC companies (will have
| to consider a couple extra points on their cap table) -
| Effectively drive the bottom 25% out of business, or prevent
| growth, by preventing them from being able to raise
| 1024core wrote:
| Is there a spreadsheet somewhere of all the companies that YC has
| invested in over the years, and what their current status is?
| redact207 wrote:
| https://www.ycombinator.com/companies/
| athrowawayyc987 wrote:
| This does not include the YC company that I am an employee at
| (maybe because we are still in "stealth mode" after two
| years)
| 1024core wrote:
| Is there a machine-readable form? A database or a spreadsheet
| perhaps?
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