I'm currently in the W22 batch. There's some heavy skepticism in this thread, so I want to add perspective from someone actually in the current batch (throwaway because we haven't announced our funding yet).
The additional $375k (+$125k OG deal = $500k) that YC is offering is an optional and uncapped SAFE. I think of this as YC being an investor in our next round, except I can receive and deploy the cash now with no premium paid to YC. This is extremely founder friendly, and is in addition to what YC had already agreed to invest in us. The terms on this SAFE are much better than what I could have negotiated on my own, and it comes with zero fundraising effort.
Because of this, I'm able to go into pitch meetings with investors around demo day in March with more leverage – I no longer need capital from them to keep the company moving in the short term. I can also make capital intensive moves I otherwise would have waited to do.
As to whether YC is a value add for us with the dilution it incurs: yes, absolutely. The valuation cap we're raising at has doubled, we have access to a great network of people and companies (this has a real and significant effect), and we were able to convince someone with the YC funding to leave their stable and well paying job to join us.
This is all in the context of a US based developer tools startup that already has a top-tier university signal (Stanford), co-founders with FAANG offers on the table, and a co-founder with years of experience working (but not as a founder) at two startups that were acquired.
I'm sure some others have better fundraising opportunities, but there is a reason many founders like myself still choose to go through YC.
I'm curious what your startup is. I'm in the devtools space as well. My email is in my profile, contact me if you're willing to share what you're working on in private.
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
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.
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.
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!
(c) Dissolution Event. If there is a Dissolution Event before the termination of this Safe, the Investor will automatically be entitled (subject to the liquidation priority set forth in Section 1(d) below) to receive a portion of Proceeds equal to the Cash-Out Amount, due and payable to the Investor immediately prior to the consummation of the Dissolution Event.
If you wind the company down, you would/should try to make your investors 'as whole as possible'.
Debt implies that at some later date YC could come asking for their $375k back. A SAFE is not debt.
If your company is running and does not end up raising more money that SAFE should just sit there waiting for the day that you do (which may never come).
There's no maturation date on a SAFE. This is all in the "User Guide" YC publishes for these instruments. The text of the SAFE refers to it as a "converting security". I'm sure there's an important distinction to be made here, but for the purposes of this discussion: if you never raise a round, the issuer just gets their money back (if money is to be had after senior claims).
>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.
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.
Yeah I agree to an extent. Founders need to get the business to an MVP and some revenue for B2B SaaS. But if you’re growing at any attractive rate, you’ll outgrow that very quickly. It’s that next step that becomes more difficult when hiring engineers. That’s typically your seed round. For example, let’s say you raise $3m. That’s a nice amount until you realize you need 3-5 engineers that are all an average of $200k/yr fully loaded.
Seems nobody is really investing in that scenario. With modest, to low investment, there should also be very modest returns. By that, I mean taking less to extend runway, but then also have it all pay very nicely on take off.
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.
Not all companies are based out of SF. For companies in India, it easily scales to 10-15 devs. You could get to a 2yr runaway with a small 10 people team.
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.
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.
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.
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.
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.
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.
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.”
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%).
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.
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.
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.
It’s about perceived possibilities and decision making really.
Will someone be able or willing to make decisions which can result in x percent of a larger company, or will they require a larger percent of a company - and hamstring it, or stop it from growing.
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.
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.
They already have exactly this issue (not that I think it's a big problem), if you apply to YC and convince them you want to build the next Slack, but in reality you just want a comfortable life for a few months, that's entirely possible already.
But since their entire business model is based on them being able to evaluate people, they probably don't think the risk of this kind of deception is too high.
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.
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.
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!
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.
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
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.
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.
I wouldn't call 400-500k a significant runway, but it should have some effect, since you can put of fund raising for at least a few months, maybe even 2 years if you're frugal. At that time you are hopefully further along.
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.
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.
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.
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.
> 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.
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.
> 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!
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 :)
You take a pay cut. In return you get to be a decision maker and drive the mission of the company.
I worked a few years at a high paying job (about $100K), am single and can forgo some luxuries. I did a startup with some friends because we enjoyed hanging out and could afford to work for free. I worked on contract for $6K a month. No benefits.
Just curious what people do once they're at a stage in life (eg kids) where taking a paycut isn't very doable? Do they simply bow out of the startup world? I wonder if people at that stage have the experience to execute startups very effectively, i wonder if there's a structural weakness in how startups are financed that with a bit more capital (and there should be plenty of that sloshing around with governments printing like crazy) they could execute far better. I dont have fully formed thoughts on this of course :)
Yes, unfortunately, that seems to be the case. I've had some startup colleagues who were married with young kids, but it was rare, and often the case that their partner had a stable well-paying job. The risk simply becomes too much of a burden at a certain point in life, for most people.
The other alternative? Be rich/have a huge nest egg, or get to seed round type funding stage super early - aka actually know how to execute on a startup.
Most sane people just don’t do startups though if they are in that position.
i think you and all the other top comments are missing the point. this isn’t meant to pay any salary at all. the cost to bring a product, nay an mvp, to market have gone up significantly since the $125k deal.
this is meant to get you through on the same rice and beans, everyone living together or better yet free in the basement, as earlier.
if you spend it on salaries you are squandering it
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 :)
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.
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 interest 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.
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).
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.
> 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.
Just to add to appsec112's point, while I did frame my original point as a 'perception', I'm willing to take a bet that if you put together US companies stats, I would be more right than wrong.
And while we are at 'actual stats' conversation, can we do the following -
- for the sake of this conversation, not divvy up enterprise/saas from devtools and enterprise-y fintech and enterprise-y health?
- publish stats on stanford/mit claim?
- publish stats on previous employer? ex-FAANG vs ex-YC portfolio vs none of those.
I appreciate YC publishing stats but the industry's work is not done when just high-level stats are published without scrutiny.
This doesn't address the claims, and honestly feels evasive. The original comment specified:
"(and that might be true for lot of the intl founders YC funds). But for most in the US"
ie., they agree things might be different for international YC startups, but they are talking specifically about US startups. That half of the startups are international doesn't matter for claims about the sub-population of US startups. Likewise, any particular type of startup could be well-represented among all YC companies but not US companies.
One problem with these stats is that they're counting the 15% of founders who are Latino as non-white. However, in countries like Brasil and especially Mexico, a large portion of the people who are able to get tech startups up and running are white people, not indigenous, mestizo, or black people. Mexico in particular has a huge problem with the elites almost all being white. Y Combinator is likely padding its diversity numbers by recruiting rich European and Mediterranean elites from Latin America. I'm not saying they definitely are, but it's very likely.
I do think it'd be more accurate to say "white or Asian" rather than just "white" when describing the bulk of Y Combinator participants. Asian people, though discriminated against in many ways in US office settings, are still firmly a part of Silicon Valley culture at all levels.
The perception tells more about the poster than YC for sure, but how will you address this ? I'll be honest, I had the exact same impression and I'm French, living in Hong Kong. For everyone, YC is a sort of Californian techno bubble, and now that I see stats, I wonder why I thought that way.
Maybe move away from California/US completely, change your own capital providers, make documentaries about how you're the top African venture capitalists and are headquartered in Kenya ? Maybe we conflate who you fund with who funds you ? Do you have the same breakdown for representatives of capital providers ?
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.
> 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."
They do [0], for each batch. Not quite at the level of granularity where you can reduce scope from everything they fund to just look at US founders, but the general trend appears towards increased diversity, and it looks like that's a YC goal as well.
Those statistics are very spotty and incomplete, though. They start with W15 but have nothing about 2016, for example. The format isn't consistent from one post to the other. They often (although not always) only give the percentage of "companies with one female founder" instead of the total percentage of female founders. They list the countries of origin but with no percentage at all except for the US.
Most importantly, they don't list the level of education of founders, which I think would show they are not primarily helping the disenfranchised.
YC is a business. It makes sense that they would choose healthy founders with high education levels, high IQ, drive, grit, what have you. They are a business, not a charity. And that's fine.
But the claim that they are making the world a better place is a bit rich. If (for example) you're funding crypto -- including NFTs! -- you're not doing that for the betterment of humanity.
Do you ever have a take that doesn't favorably frame your preferred discussion parameters whether they're stated or not? Isn't there a way to imagine this has been binary in some people's experience? Wouldn't that be a failure of this mission you'd want to know about?
Rural Canadian with no college degree here. Our competing fundraising offers were 1. A $10k loan from a bank or 2. $250k CAD on $750k CAD with a board seat and 2x liquidation preference. YC deal was like helicopter money generous at $125k SAFE for 7% compared to alternatives.
Sharing my personal experience here, as I found this thread interesting. To be clear: this anecdote isn't intended to argue with the statistics mentioned in sibling comments, or that YC doesn't fund outsiders, nor do I claim to be 'an outsider' in the first place. In any case I believe YC should fund or not fund whomever they want. But I hope it shows how some of these feelings can arise.
For context: white man from Brazil, top Brazilian uni but no brand-name US MBA or MS, Bain + Private Equity, first applied to YC with a startup in my late 20s when I left PE in late 2015. Since then have applied perhaps half a dozen times, sometimes with something that was still on paper, sometimes with things I was working on with a team and were already advanced. Some theses more enterprise-y (e.g. corporate education benefit platform), some pure consumer fun (e.g. stickers), some 'you must be joking' (e.g. let's redesign the web). My cofounders are brilliant in their domains but often don't speak great English, and they have small shares in the company as they need to take salaries, while I don't and I do the initial funding, so either I show up as a sole founder, or I have them on the video subtitled which ends up a bit weird.
About 2 years ago, our startup (which we had applied with to YC a couple of times before) reached US$6M ARR. Until then we had bootstrapped it, but decided it now made sense to go for VC. At that size we spoke directly to VC firms, of course, but given that we were all the way over here in Brazil, and Brazilian VCs by and large focus on local theses (at least in the early stage) rather than global ones, I also thought that it would make sense to talk to YC, as even though the dilution would be painful, that would multiply our global VC network in one go and thereby perhaps pay for itself. One catalyst for that was when a VC from a top-10 US firm reached out to us, but ultimately said "Look, if you were in the US, we'd be able to fund you Series A no sweat, but in Latam we only go in once things are at Series C". So I led our presentation video for YC with "Hi! We're X. We have US$6M ARR" making a 6 with my fingers. I realize of course that that per se doesn't make a company attractive, but I thought that at least it would buy us an interview. Nope.
Although it may come across as arrogant to do so, I do think that was a clear-cut investing mistake of omission, simply because our actual ex-post performance would have compensated YC very well had they invested, even without factoring in any value-add.
I later found out YC in that batch backed a tiny startup in the same field which (to the best of my knowledge) had struggled in consumer (competing directly against us), had little-to-no-revenue and was now trying to go for a B2B approach (which we had analyzed but dismissed as unattractive). Really made me rethink whether it was a good idea to put lots of our sexy stats in the application; not that I am saying YC used them - but it drove home how they could have.
We applied with a new unrelated thing once after that, even though we didn't need the money, mostly because we think it would be an interesting personal experience, and a good investment for the long-term to build that network. But frankly the program now being remote also puts a bit of a question mark there - it's a mixed blessing.
Anyway, we've done well enough, and one thing I'm considering is setting up a small angel fund just focused on founders in emerging markets (esp. Latam, esp. Brazil) whose products are global from the start, like ours, as I do feel that still falls in-between the cracks. But I'm busy with our company so don't have much time for that yet.
I hope this was helpful without coming across as too whiny or salty!
I realize that these funnel processes with vast amounts of applications are needle-in-the-haystack hell. I experience it when we open up a job post and get just 200 applications 180 of which aren't a great fit, let alone the thousands YC gets. Perhaps with some of these demographics, YC faces, to a small degree, a problem analogous to iBuying (e.g. as discussed by Rich Barton when Zillow quit that market), where the selectiveness by definition means that the majority of applications are rejected, thus contradicting the 'fast & easy' value-proposition and thereby generating negative sentiment among those rejected, no matter how generous the offer to those accepted or how representative the sample of those accepted.
As a response to both dang and emmett, I'm honestly surprised by the strong defensive nature of both your responses. It's what I'd expect from old-school VCs, not YC.
Both appsec112 and infamia already responded to each of your nitpicks, and we can slice and dice categories, labels and phrasing till the cows come home but I was hoping for a more substantive, introspective or atleast a thoughtful response to the original thread.
Maybe there will be a better forum for this conversation some day but as an under-represented founder, this feels like a cynically but not surprisingly another disappointing conversation.
> 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
Same. $500K is huge for us older engineers with families. Let's not forget - the average age of successful entrepreneurs is 45... (ok unicorns average 34 - but they're f&cking UNICORNS!!).
> YC does that because it's in its business interests to do it and because it's good for the world.
See, this is where I disagree. This is all well and good, but only if you accept the fundamental premise that taking VC investment is the best way to become an entrepreneur and to do good for the world.
I would strongly challenge this premise. I think for the vast majority of tech entrepreneurs, aiming to build a slowly growing business that doesn't have the aspiration to become a unicorn and 1000x everything is much, much better. I think that many great businesses failed because they were convinced by the VC-marketing-hype-machine to take on venture capital.
If YC's goal truly is to do good for the world, they would think about ways to help entrepreneurs make that happen, not force them into the VC world. I know that there are cases where VC-type capital is extremely valuable, and I'm glad that it exists, but for the vast majority, it's the wrong tool for the job.
YC's whole business model is based on the venture capital investment model. As you mentioned, they make a VC-type investment themselves initially. Then, at demo day they invite VCs. Then, they have their follow on VC investment rounds (not sure what it's called). In their educational materials, they preach hyper growth and even define a "startup" as a company that's designed to grow quickly.
Sure, but they're also happy to let founders do their own thing too rather than blinding preaching get big now like most VCs. As pointed out they've already got their cut so they'd rather have a success than a business that burnt out by trying to scale too big or too soon.
Yes sure, they don't force you to take additional VC money. But we all know that if all of their startups never raised VC again and grew slowly and profitably, their whole business model wouldn't work. So, let's cut the BS :-)
YC is great but it's a bit of a hyperbole saying they're driving for "good for the world" and giving chances to the minority/contrarians that wouldn't otherwise get funding.
It would be good to see stats on proportion of ivy league founders or those with previously successful/exited founders in YC. A lot of the applicants are impressive (obviously) and already have a decent chance of getting SV investors- and even more so outside the valley.
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.
> 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.
> 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.
It's interesting you brought up this point specifically. My impression was that YC tended overwhelmingly to fund the more elite demographics.
What % of YC investments go to founders who either worked at "a FAANG job" or graduated from Harvard, MIT or Stanford? What percentage of people (from the US and globally) have that background?
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.
On keeping the captable "clean", this is what Michael Siebel had to say:
> Can we kill the myth that your company is screwed if there are too many investors on your angel/seed round cap table? Having too many angel/seed investors on a cap table has never killed a single YC startup. For founders who are raising: if you can get the money you need and reduce dilution as much as possible - I don’t care if you collect 1 check or 20.
True, but it can make negotiations later on a lot harder and it increases the chance of having a problematic investor on board. The more professional investors are the easier it is to make deals. A start-up doesn't have to be killed for it to be a problem. Speaking from experience: I had a 5% problematic shareholder in camarades.com/ww.com in 1998 and it significantly reduced our chances of success.
> [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.
You were in YC? What!? I thought I knew about Daniel Gackle from the piece in (NY Times?). Or a little bit from our email conversations...I had no idea you were ever a founder. I thought you were a book and poetry woodsman who somehow found his way into moderating an internet wild west. Like a new Sherriff wanders into town fortuitously as the old was is killed in a showdown. But its, not...like that?
This is also a lot more realistic for hardware startups. I hope this also means we'll see more of them get funded. When you need a ventilator there's no amount of ride-sharing, delivery-service, home-renting, etc. that can save your life (sorry, could not resist).
Yes, it is a lot harder to unicorn a hardware startup. If the goal is "because it's good for the world" this should not be a barrier to entry. Not saying it is or ever was, that's simply what it feels like from the outside while looking at the VC community in general hunt for the proverbial unicorn.
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!
Wages are relatively high where I live but there is no VC, so YC wasn't quite the right fit before where now it could work quite well.
With 125k it would have just been me and maybe a cofounder working for about a year or two, I wouldn't need all 125k for myself but I also couldn't hire anyone extra with 125k. I would be happy with that, but it wouldn't be the best outcome possible. At 500k hiring someone is now very possible, it's a huge increase, and another soul on board is a huge win.
> YC does that because it's in its business interests to do it and because it's good for the world.
YC does it because if you're successful they get to be a landlord over 7% of your company in perpetuity. If it was for the good of the world they'd let their equity expire eventually, or only keep a minimal perpetual part that went straight into funding new YC companies.
Hi, Dang, really glad to hear about YC being the bridge for everybody else to enter startup space. Does YC accept applications from South East Asia ? This is the place where there will be a lot of growth opportunities but very few funding options. Should people register the company in Singapore to make it easier to apply to YC?
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...
>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.
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.
Anyone who is not buying property because they can’t afford it (say in San Francisco), and is instead investing as a retail investor, is indirectly doing so because of low fed rates. Although I am unsure how much money flows into VC from retail investors via funds.
Low fed rates lead to an overpriced home market (people borrow as much as they can afford to bid on a house, and what they can afford depends on interest repayments which depends upon interest rates).
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.
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.
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?
You have $375k extra runway to increase the valuation of your company. If you are increasing the valuation enough, then the extra runway is worth far more to you than the dilution costs you. Without this deal, a 375k seed would likely cost you far more dilution.
If you have a successful startup, then the YC 7% for $125k and YC’s 4% participating is far more significant in terms of dilution.
Let’s say you sell 10% equity in a 5 million post valuation seed round with no option pool. Seed investor invests $500k for 10% preferential shares. YC ‘MFN safe’ converts at $375k value for 7.5% preferential shares. YC also has a 4% participation right, so it puts an extra $200k in for 4% preferential shares. For their ‘$125k safe’ YC had 7% premoney, which ends up being 5.5% preferential shares*. YC has put in a total of $700k for 17% of the business and has made $150k profit (assuming no other internal costs!). Founders have 73% common shares with a post money valuation of $3.6 million.
Let’s say you use the $500k from YC as your “seed round”, so instead your first round is your A series selling 25% with a post money valuation of $20 million, and a 10% post money option pool (which usually all comes from the pre money investors). Round A investor invests $5 million for 25% preferential shares. YC MFN converts at $375k value for 1.9% preferential shares. YC also has a 4% participation right, so it puts an extra $800k in for 4% preferential shares. Pool gets 10% common shares. For their $125k YC had 7% premoney, which ends up being 4.1% preferential shares*. YC has put in a total of $1.3 million for 10% of the business and has made $700k profit. Founders have 55% common shares with a post money valuation of $11 million.
During all of this, the founders have the most influence over choosing investor amounts and timing. YC only makes money if the founders do, and YC is more aligned with founders than most other seed or VC funding. YC invests resources including money into the business, and profits only a small amount in comparison with the founders who mostly invest their time. YC also drives down costs, especially the most significant cost which is the founders time, but also with standardised cheap legal documents etcetera. Other VCs can waste a lot of a companies time and money.
* Edit: I think my YC 7% calculations are incorrect, because I was presuming that it was pre-money that followed the same rules as the founders shares. However “YC’s $125k Safe will convert in the priced round into 7% of the company’s equity (including any existing option pool) after all the Safes and other convertible instruments have converted in conjunction with the priced round.” That reads more like 7% post-money and then diluted by options pool. In which case YC ends up with ~2.5 percentage points extra and founders with ~2.5 percentage points less in both examples. If somebody wants some HN love hugs, perhaps make a simple online calculator.
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?
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.)
> 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
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.
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.
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.
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.
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....
I don't understand at all. I know nothing about startups - so is it an additional 7% that YC owns for every additional 125k, so 28% for 500k? Disclosure - I did not watch the SAFE video.
Roughly: The additional converts at the best deal another investor gets at/before the next priced round.
If the next priced round is at $7.5M, their $375K converts at that price (so it buys them another 5%). If your next round is not above $1.8M, it’s already an unfavorable sign.
The only downside I see is it doesn’t let you raise another small amount without valuing YC’s follow-on $375K. You might want to do such a raise for strategic rather than financial reasons and this would be an overhang against that. (I don’t think it’s that big a deal in practice and the additional committed money is probably better by way more than this detriment.)
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.
The W22 batch is only 65 companies? Am I reading/filtering the Startup Directory correctly? This would be a huge reduction from the ~300 companies per batch of late.
I think Winter 22 would be the batch that runs from January-March of 22.
*Jaxkr's comment above answers my question. I just looked again and now the directory shows 68 companies, so it's just a matter of not having the full list of companies in the directory yet.
But looking again now I see that was posted 30 June 2021; so it means 19 July 2021 (just doesn't specify the year and I didn't notice a published-at date before).
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
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.
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.
I've read this post probably 20 times in the last day or so (honestly) - and I'm still trying to puzzle through what the possible negative elements are.
I think the idea is that the VC is coming in at $20M valuation, but the angels are coming in at $12M valuation, and you want the angels money (for their connections/assistance) - but only want, say, $150K of their money at $12M valuation. But, if you accept their money at $12M, then you also have to accept YC @ $375K as well - which leads to greater dilution than you want.
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
> 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.
> 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.
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.)
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.
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.
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.
> 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).
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.
> 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.
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
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
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.
> 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.
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.
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.
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.
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.
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.
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?
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.
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.
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%.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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...
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.
Why would you need to give up a higher percentage of your company? Can't you just give those later investors a smaller share in exchange for $375k less money?
And getting the money now instead of later sounds to me like an amazing deal; you can continue for longer before you need to find those later investors, and by that time, you'll be worth more and get a better deal from them, and therefore also get a better deal from YC.
I don't know much about startup financing, but to my layman's eyes, this sounds like a good deal.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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 been helpful! But no. Clearly YC doesn't care about founders.
YC really ought to stop making things worse for founders like this. I mean how dare they.
I'm building a registry[0] and registrar[1] for my portfolio of Handshake[2] names. I have no idea if it'll be interesting to them but it doesn't hurt to try.
Regardless of the outcome, I intend to release by end of Q1 of this year. After the codebases are stable I'm gonna open-source everything. The $500k will just enable me to work on it full-time, eliminate minor debt, and allow me to release faster.
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”.
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.
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.
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.
$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.
Very happy with this because it makes raising from YC valuable in terms of the money raised; $125k was not much any more. With $500k you can actually hire one or two (or many more depending on location. Imagine India…) full time employees with > 1 year of runway. Or you can bootstrap a few founders for multiple years.
Personally I know many people in my area and age range (mid 20s Bay Area) who would and could put up $125k to self fund their startup, but not many who would put up $500k, even if they technically could.
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?
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.
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].
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.
This is a lot of money, but the way this additional safe works is a bit scary. It takes on the terms of the lowest cap safe or convertible note between "when you're accepted to Y Combinator" and when you raise a priced round. Obviously the $125k Y Combinator safe is issued after you're accepted, so its cap should be one of the options for the MFN cap based on that wording. I believe Y Combinator's $125k for 7% is a post-money cap safe, which means the cap should be $1,785,714.
This is a pretty low cap and a startup is unlikely to raise more seed rounds at an even lower cap than that, though it could happen. So once you raise a priced round, Y Combinator's additional $375k converts into, at best, 21% of your company, or an even higher percentage if you raise additional safes or convertible notes at a lower cap. This means that as long as you raise a priced round or hit a liquidity event, Y Combinator will own 28% of your company or more in exchange for $500,000. It's not a terrible deal, but it's a massive chunk of your company.
To me, if you've already given up 28% of your company long before you've raised $1 million, you're setting yourself up to eventually have the founders' share of equity at mid-to-high single digits by the time your company IPOs or is acquired as a unicorn. You're basically setting yourself up to be like the Box co-founders, on the opposite end of the spectrum from a high-equity founder group like that of Square (34% at IPO despite raising $500 million in equity financing).
Somebody tell me if I'm wrong about the terms here. I'm a lawyer, but not a venture capital lawyer.
Okay, I'm being told that Y Combinator's $125k safe for the 7% doesn't have a cap. Sorry for not realizing that, they don't seem to mention the lack of a cap in their "deal" descriptions. If that's the case, then it shouldn't affect the MFN safe. Though it's possible that they've modified the $125k safe to have a cap now.
> 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?
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.
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.
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.
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?
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.
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.
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).
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.
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?
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.
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.
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."
Guys, after reading the first lines of the blogpost I seriously thought for the first time I could take the leap
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?
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?
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.
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].
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.
$125,000 for 7% is still exploitative, not even considering the inflation of the money supply we’re seen recently. So much money chasing deals and this term hasn’t budged.
First, no one is forcing anyone to take this money. You should only take the deal if you think it makes your company more valuable.
Anecdotally, I was offered $125k with similar terms from someone after they saw a prototype of a product I'm building. This person isn't a professional investor, doesn't have a network that adds value in this case, and doesn't have any name recognition. It was easy to turn down the money, although I did thank them and offer to reach out to them in a future fundraising round.
YC has an extensive investor database and a ton of name recognition. Every founder I've spoken to or heard from that went into YC says it was 100% the right trade to make.
Some founders have said that the moment they could say YC invested in them, they're hiring problems were dramatically reduced. Others have said they would have given up 7% just for the access to the advice and data they received as part of being in YC, plus the name recognition.
If you've built companies before I'd love to hear your take on fundraising and what you would consider fair.
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?
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?
The two safe combo is brilliant win-win for YC and the startup. I wonder if the uncapped MFN safe from YC will set a precedent and encourage startups to ask for more uncapped safes from other investors? And what are the negative effects of this.
I think there YC could create a new safe category and have this as “combo safe”. Portion of the moneys come capped and the rest come uncapped. Will be win win for future safe investors and startups.
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.
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.
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.
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.
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.
> 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?
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.
Will this attract people who try to game the application and the interview process just to get in? Does this in effect force YC to adjust their interview process and possibly make it harder for anyone to get in? I wonder if there are unforeseen side effects beyond just the increased figure.
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.
If you wanted to raise $1m at $10m post, well, you already have the $375k, so you can just raise $625k at 10m post now and your outcome is the same as the prior YC arrangement.
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.
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.:
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.
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.
Not sure you're going to get an answer from someone more knowledgeable at this point, but from my understanding, the answer is "some." Obviously, the more users the better. You have more traction and a bigger base to get feedback and improve your product. However, YC has still publicly stated that they do fund people based on an idea or MVP without any users, but you'll need a stronger founder profile / problem with unique perspective / MVP to compensate.
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!
(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.
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?
What do you do with $500K? It's such a small amount. If you want to hire a single great developer, that amount will buy you his time for a year, maybe two.
We take pay cuts to work at a startup in favour of equity, not every startup needs a former FAANG Staff engineer in SF, and the idea is for the money to last about a year. If it’s lasting two, investors will be upset the company is turning into a lifestyle business. Get traction and re-raise.
They made it work with $125k, I don’t understand the push back with 3x as much money.
And let's face it. 500k salaries are definitely overpaid. No one in the world other than FAANG engineers get that salary and they are definitely not the best software engineers out there.
We’ve applied to YC for ten years straight with Qbix Inc (https://qbix.com) always filling out our latest progress and achievements…
We always got rejected!! I can share the application, if interested.
Actually, we never wound up raising VC. We did get a bunch of friends and family, and angels, made around a million dollars in revenues, and reinvested it all into the https://github.com/Qbix/Platform - an open source alternative to Facebook et al. Got 10 million users in 95+ countries to download our apps in the stores, translated the apps into 15 languages, and spun out another company called Intercoin.
We’re on the east coast and children of immigrants, so we didn’t have a strong network. Maybe that has something to do with it.
I guess the stuff we’re building (open source, decentralized social platforms) just isn’t exciting for VCs, who would prefer we focus on one application, getting a hockey stick and not giving away the source code. But we wound up “building things people want” and then some… the David Heinemeier Hansson / Basecamp way (anyone remember his lectures about not taking VC?)
PS: Okay, well… NOW it seems funds like Alexis Ohanian’s and Polygon team up and have set aside $200MM for decentralized social networks, which we probably have an 8-10 year head start on everyone else with.
PPS: In 2018 we spun out https://intercoin.org (much better looking site) same approach but in the Web3 space instead of Web2. Once again, people who throw money at NFTs and memecoins all day long wouldn’t give us a dollar. They at least considered us and told us our goals were too big. We still ended up raising over half a million dollars, but from individual angels who care about things like social impact and universal basic income. All the code is at https://github.com/Intercoin
Should we apply to YC again? We like YC, but it doesn’t seem to like us…
You're 10 years in but with revenue of $1m. You're surprised YC didn't give you $125k through 10 years of illiquidity for that? YC-funded Amplitude is 10 years old with $150m in revenue.
> I guess the stuff we’re building (open source, decentralized social platforms) just isn’t exciting for VC
Elasticsearch, MongoDb, Gitlab, HashiCorp, etc, etc. Wrong. Plenty of open source has VC funding, you just have very few github stars and a couple devs.
> prefer we focus on one application
Yes that seems to help with...
> getting a hockey stick
Which is what a VC funded business is trying to do.
But unfortunately, rather than introspect deeper, you end up blaming
> We’re on the east coast and children of immigrants
Ignoring the massive amount of YC startups all over the US (you're in NYC, that is... not an excuse), other countries, and by immigrants.
“You only raised $100,000 in funding, spent zero on marketing and PR, bootstrapped by working hard to service real clients, and only made $1,000,000 after all that time.
You’re surprised that VCs didn’t give you $1 million? They would have waited 10 years to see you make this same $1 million.
YC-Funded OpenSea has gone on to raise lots of rounds from more VCs due to connections and hype, and now finally generated more money in shorter time than you. No wonder no one wanted to fund you.”
Ummmm…
You do realize that you’re ignoring the totally unequal starting conditions and playing field between someone who is picked to be given a large sum of money, access to a large network of investors and hiring opportunitirs, automatic built-in PR, and much more, vs someone who doesn’t have those things? And despite all that, many startups with all that going for them fail — eg to recoup the investment and generate revenue, founders leave etc. We have stuck with it for 10 years regardless of support from others, and now built our own network and are doing things that are much larger than most “app feature” startups. After all, we had to build entire platforms.
I am not saying this to brag. I am saying that the mentality around what gets funded and how, is so entrenched, that you could unironically make the above argument.
There are many open source projects that have similarly not received VC funding for years, yet have helped liberate the world. While the VC funded projects have often led to closed-source Big Tech monopolies that extract rents forever to satisfy wall street earnings.
And we would have been part of that entire VC funded economic model, if it wanted us, but it rejected our open source platforms like a poison pill. We aren’t changing the story to sound like we were “too good” for VC, like KeyBase sold itself to Zoom and WhatsApp sold to Facebook. We would have taken VC but we would have never sold or been acqui-hired. As it is, though, we were forced to stay independent this whole time.
> Wrong. Plenty of open source has funding today.
Let’s pick two of the biggest ones powering the entire Web today. The ones who didn’t have connections to Silicon Valley, shall we.
Was so good, it gradually replaced Apache and Microsoft IIS. (Lighthttpd never did get much love.) From 2002 to 2011 the author (Igor Sysoev in Russia) developed it without having any VC funding, in 2011 he finally started a company w the same name.
Started in 1995 and only got its first VC in 2001, from Scandinavian VCs. They proudly considered themselves a “second gen open source model” of giving their software away and charging for support, rather than dual licensing. Anyway, MySQL had to persevere and build their product with no VC support for 6 years, it was finally sold to Sun Microsystems, now it is under Oracle, and the open source community has forked it into MariaDB.
And even today, take a look at projects like MaidSAFE that have worked since 2006 to build an amazing next-generation Web4 system for the entire world. VCs wouldn’t touch something like that until it was mature.
“Why fund open source Web 2.0 or 3.0 platforms that liberate the world when you can let people trade JPEGs on the Internet using a closed centralized service. That’s what the people want today.”
That’s why cryptocurrency has democratized investment and Web3 will eventually do to gatekeeper institutions what Web1 did to established newspapers, magazines, cable channels, radio stations and so forth.
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."
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.
For some companies existing for a couple years, sure. For others, they just gave a person with an idea a 1.66m company (93% of a suddenly worth 1.785m idea).
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.
There is literally a clickable addendum leading you right to a sentence that spells out what it means by "Most Favored Nation." Or maybe you just prefer to spell out HTTP every time you're in code review.
The additional $375k (+$125k OG deal = $500k) that YC is offering is an optional and uncapped SAFE. I think of this as YC being an investor in our next round, except I can receive and deploy the cash now with no premium paid to YC. This is extremely founder friendly, and is in addition to what YC had already agreed to invest in us. The terms on this SAFE are much better than what I could have negotiated on my own, and it comes with zero fundraising effort.
Because of this, I'm able to go into pitch meetings with investors around demo day in March with more leverage – I no longer need capital from them to keep the company moving in the short term. I can also make capital intensive moves I otherwise would have waited to do.
As to whether YC is a value add for us with the dilution it incurs: yes, absolutely. The valuation cap we're raising at has doubled, we have access to a great network of people and companies (this has a real and significant effect), and we were able to convince someone with the YC funding to leave their stable and well paying job to join us.
This is all in the context of a US based developer tools startup that already has a top-tier university signal (Stanford), co-founders with FAANG offers on the table, and a co-founder with years of experience working (but not as a founder) at two startups that were acquired.
I'm sure some others have better fundraising opportunities, but there is a reason many founders like myself still choose to go through YC.