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Comment by bjornsing | Hacker News Reader

> Instead of taking our equity up front, we’re going to be issuing a convertible security that only converts into shares when the company 1) goes IPO or 2) has a funding event or acquisition that values the company at $100M or higher. [...] it’s both founder friendly [...]

Is it (founder friendly)? It places YC (even more) firmly on the VC side of the classic VC/founder conflict: VCs want founders to go big or go home, or as pg puts it "VCs want to blow you up, in one sense of the phrase or the other." [1] Not that I don't think YC can handle it, but still.

1. http://paulgraham.com/aord.html

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The money is effectively free for founders unless their company does incredibly well.

Also, at 1.5% equity and no effective shares till that valuation threshold, we don't have enough equity to force companies to do anything they don't want. That's also part of our philosophy anyway.

> That's also part of our philosophy anyway.

True. That's why I said you guys can handle it. ;)

My wild speculation is that taking equity in exchange for the money simplifies legal and tax status for both parties by framing the relationship between the company and YC in a well precedented way. But I am neither lawyer nor accountant.

Anyway, my gut suggests that pressure cooking a company to go public or raise a big round for the sake of a possibility of $1.5 million probably isn't highly ranked among the ways YC can direct effort for return on capital. That YC won't have a stake in a $50 million dollar acquisition may indicate how pennies and nickels are seen by YC.

It strikes me more as just a protection against the case of a massive company being born in the fellowship.

If they just put the cash up for people to work on interesting things and it helps grow the YC network and feed some interesting companies into the YC Core program, then it's probably worth it without any equity compensation.

But that model wouldn't look so great if the next Google comes out of the program but doesn't do the YC Core program, resulting in a massive outcome that YC doesn't get to participate in.

This model supports the former and protects against the latter, in a way that seems really founder-friendly to me. Founders could take the money and build a small business, go to YC Core, give up altogether, or leave the YC ecosystem and build a massive company – and regardless which path they take, this capital won't cost them anything unless they build something massive.

At 1.5% ownership, YC has no say over the direction of the company (other than through the influence they have from being well-known and respected in the startup space). The conflict arises when your VCs sit on, or even control, your board. Then you, as the Founder/CEO, can be forced by your board in directions that you don't want to go. That situation simply does not exist here, with YC taking such a low ownership stake. Nor does it exist in the normal YC program, since again, they do not take board seats with their 7% stake.

> Then you, as the Founder/CEO, can be forced by your board in directions that you don't want to go.

In my experience that happens very rarely. If the board votes at all, and especially if in a direction that the CEO doesn't want to go, then it's usually a vote to dismiss the CEO.

But the people you surround yourself with (and their incentives) do matter. "Control" is a lot more subtle and social than you might expect.

Sure, the board may rarely actually hold a vote on a given direction, but their ability to vote to remove the CEO is a huge threat hanging over the CEO. If a majority of the board favors a certain direction, even if they don't hold a vote on it, that exerts enormous pressure on the CEO to follow that direction.

In that sense, we are saying the same thing. I agree that "control" does not require voting by the board. I do assert that investors with board seats exert far more control that those without, and investors with higher equity positions exert more control than those with less. I also assert that an equity stake of 1.5% exerts very little control. Again, YC exerts _influence_ (call it control if you want) simply because of their reputation for being good at what they do, but 1.5% ownership barely changes that equation.

I wonder if YC will see accept any companies/ideas that have a low probability of of reaching IPO / acquisition at >= $100M. Plenty of good companies aren't going to reach this scale but could certainly use their expertise and cash.

This is not something we actively try to predict, even with the Core program. Airbnb, for instance, would have been missed if we thought like this. As ever, we primarily optimize for funding great founders.

Really like this. If a great founder switches ideas while in their fellowship based on advice and market conversations, it seems like there would be no issue with doing so.

They are giving the companies 20k for 1.5% stake so they would make 1.5 mil when their investment pays off. 1.5 mill /20k = 1.3%. They only need 1.3% of the companies they invest in to pay off to make money so I think they will be fine investing in low probability companies. 1.3% is 1 out of 75.

1.3% is a HUGE percentage of companies that have to make a 100mn "exit."

I expect they're looking more for >0.013% to become $10B companies than 1.3% to become $100M companies.

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