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.
