Yuri Milner, SV Angel Offer Every New Y Combinator Startup $150k | Hacker News Reader

Yuri Milner, SV Angel Offer Every New Y Combinator Startup $150k

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425 pointsssclafani189 comments

For all the talk from U.S. politicians about encouraging innovation, it takes the Russian to come here and put his money where his mouth is.

Consider, also, that most entrepreneurs in tech are foreigners (or children of), Vivek Wadwha had an interesting article on that. But those that stand out: Larry+Sergei.

If "The Russian" comes to the U.S. to make an investment is because the U.S. has done a really really good job in terms of policy to make it easy and convenient for foreign investors to bring money to the U.S. now they (gov) need to do the same for talent/entrepreneurs.

A while back as I was meandering through my history readings, I noticed that most of the philosophers, sages, and artists of ancient Athens weren't from Athens. I didn't actually follow that up with a study to confirm it, but I can't help but wonder if there is some deep truth hidden here.

No deep truth, if you're ambitious and determined enough go leave your home and everything and everybody you know, you're not going to arrive in a foreign land and sit on your ass - the drive will keep pushing you to achieve great things... otherwise you could just have stayed at home and eaten your mom's potatoes for the rest of your life, right?!

Digging up Vivek Wadwha's article, he found that 25% of U.S. tech entrepreneurs were immigrants, which is certainly higher than their share of the population (about 10% of U.S. residents are foreign-born), but not really "most". The numbers were higher for the Bay Area, though, at about 50%; but then the number of total immigrants in the Bay Area is also higher (33% of Californians are foreign-born).

Possibly a sign of different upbringings?

Can be parental, culture, education, standard of living, etc.

It seems to me that the case is exactly the opposite: the talent appears randomly, so the only way to concentrate it is migration.

> the talent appears randomly

That's a pretty strong statement, but even if we take it as an axiom, I think that it isn't migration that concentrates it -- people migrate from everywhere to everywhere all the time.

I think it has more to do with having gone through some hardship, and (selection bias) having done so successfully, makes people better at taking risks.

There's a statistic that says that a huge number (ten percent or so) of immigrants immigrate again to a 3rd country.

Someone who never immigrated would think "all that trouble, again?". Someone who [successfully] has thinks "Well, that wasn't so hard, we can try that again".

I think you missed the point- he meant that the fact that you were able to immigrate probably means that you're not the average person. He's right- immigration is much easier if you're rich, smart or both.

Also, I'm offended by your last sentence. You've obviously not immigrated to america recently. I have, and it wasn't easy, nor was it cheap.

As a matter of fact, I did. It's not easy, it's far from cheap, but having gone through all of that, another move -- at least to an English speaking country -- is comparatively trivial to what I've thought about it before.

And if you take offence at random remarks by strangers on the internet, you should have a long talk with yourself.

I meant that it appears to be random (or even anti-intuitively correlated) if you look at one factor only: I believe you need both genetics and environment.

The anti-intuitive thing is what others have said: migrants are bolder (entrepeneurish) or they have some requested talent.

As an ex-immigrant (returned to India now to start something), I believe this is true. US immigration policy weeds out the chaff. The immigrant populations from countries like India tend to also be homogeneously upper class/caste.

And it helps when your investment company now owns 10% of Facebook. Smart guy who takes bold risks.

I'm tempted to say 150k is not a bold risk for this guy. Neither is 150k * 50. Small cost to expand your portfolio... and you just need one homerun.

When YC takes developers and mentors them towards a first version in an aggressive timeframe with limited resources, it's encouraging innovation. When someone comes in and gives a bunch of company they know nothing about $150k each, it's called having more money than sense.

But they aren't investing in companies they know nothing about. They're investing in companies that have made it through the YC sieve. If nothing else, they know that about them.

These are investors with a large number of connections in the silicon valley world. My assumption is that they have some extremely well-informed spreadsheets about past YC company performance.

I do have huge respect to YC personnel and companies, but not sure performance so far is at a level that makes it a sure investment. Even so, YC's model is small fiscal investments and large time/mentoring investment. I doubt that the opposite would work as well.

Super news this, that's going to have one nasty little side effect, YC will see an order of magnitude increase in the number of applications they will receive in the next round.

Predictably there will be a lot of bitching by other angels, imo they should create a fund and offer to match.

YC might become a one stop shop.

Is more applications necessarily a bad thing though? Sure they are likely to miss more winners and the application/ interview process is going to be even more time consuming but you would have to think it would translate to a highly quality group.

Reviewing applications is hard work.

YC now has more partners and a larger network of alumni so that should help a bit with scaling this.

And that's why this move is a smart one : Yuri has effectively outsourced all the valuation work for the investments onto really smart people that he doesn't have to pay anything for.

While that doesn't seem particularly fair to the rest of the VC community, it's exactly analogous to investing in an S&P ETF (which just invests in a whole bunch of stocks at the current market prices).

This sounds like a campus placement scene. If you get in a top college, you wont be even interviewed properly or see how you have changed in last few years/months. We will just hire you with fat paychecks.

As shown by history - this does not work in the long run and makes things worse than better.

Dont get me wrong - YC is great, pg and rest of the team do an amazing job of selecting startups. But such blanket offers will mean lesser money available to non-YC companies. So if you are competing with a YC company, you have so much ground to cover.

More money for startups is good, but quality of the startups should be judged almost every 3 months. That is very healthy for entire startup community on the whole.

> But such blanket offers will mean lesser money available to non-YC companies.

They could have bought a boat instead, investing is not a zero sum game, they don't have to spend the money.

Right. We will just invest in all YC companies. Why bother reading up business plans, checking out markets, exploring new things. YC thinks some one is good, we will put our money. If 10% of YC companies give huge exits fine. As investors - our job is to just provide money. Why bother with research?

And as an entrepreneur, do you really want to take money from some one who might not have enough knowledge about you and your business? Who is relying on a second hand judgement about you and your business, even if that judgement directly comes from pg?

"And as an entrepreneur, do you really want to take money from some one who might not have enough knowledge about you and your business?"

Um, yes. Taking money with these terms is a no-brainer. It doesn't preclude you from taking on more active money or taking on advisors. Anyone who puts together an angel syndicate almost always has investors who say, "I'm really busy, so I can't help out much, but here's my money". Most angels think about your business for a few hours a month, at best.

Most things I learnt about my own business had been through quality meetings with quality investors who can ask really good questions. At least from first set of investors, thats what I look for the most rather than money.

Having said so I do see your point as well and we can just agree to disagree.

Just because you want smart money doesn't mean you should refuse free money. If an angel were looking at a team that didn't take this money, they'd have to wonder if they were competent enough to run a business.

I'd say free money is more corrosive - yes in the hands of some (some is relative) it will be useful. In the hands of others will let them walk down a bad path longer.

For analogy, I'd use the resource curse. Countries which should theoretically be paradises are not, because their natural resources prop up bad economics and bad governance.

As always, its an opinion. I guess a data driven answer would depend on the contra event of what these companies would have done if they weren't offered the money.

" But such blanket offers will mean lesser money available to non-YC companies"

I actually think precisely the opposite will happen.

I think you're right. It's like the concept of "anchoring", setting a new normal.

I dont have first hand experience of US placements. But this is what happened in India when IT services started booming.

If you go to a top college, they dont interview much. You get a very fat paycheck. If you go to tier II college you are interviewed a bit more and given a bit thinner paycheck.

Over a period of time this became a positive feedback cycle and is the core reason for very low quality yet expensive workforce.

What I feel in my gut is - such blanket investments normally take up valuations to such levels over a period of time that it becomes unsustainable. Whether it is with job markets or investments or real estate.

I thought this too, but someone pointed out to me that, unlike new hires at companies, customers don't care whether you're YC or not, or who you took investment from. The market is still as harsh as ever, and you'd better produce if you're going to make it.

The only place I can see this as being a problem is with acuhires, where an acquiring company can potentially care whether it's a YC company or not.

"As shown by history - this does not work in the long run and makes things worse than better."

Any evidence for this statement? Because I think the system works just fine.

Web startups are now rock bands, and YC is the record label.

%cough% There is more to the startup world than just "web" startups, ya know. %cough%

And YC don't limit themselves to just web startups, or even just to software companies, according to the FAQ. [1]

[1]: http://ycombinator.com/faq.html

Relatively few are pure web startups. They all have websites, of course, but most companies YC funds are in a particular business.

I know people are excited right now, but this is a terrible analogy. Rock bands don't need labels to succeed anymore, and the vast majority of record labels are deeply corrupt. They are consolidating to avoid bankruptcy, and throwing their CapEx funding into litigators and lobbyists so that they have someone to blame when in reality it was their greed and ignorance that brought their downfall.

Does that sound like what's happening at Y-Combinator?

I thought rock bands got shitty contract deals from record labels. These terms seem pretty fair and very unlike the recording industry.

On the surface, YCombinator IS giving a shitty deal. 6% for a few thousand dollars? That's highway robbery.

Except, of course, you're getting a lot more than money for your 6%. The difference is that YCombinator's promise are much less empty than that of a record labels.

(I know, I deflected. Milner's terms are not shitty. It's YCombinator's that are, but only on the surface).

>On the surface, YCombinator IS giving a shitty deal. 6% for a few thousand dollars? That's highway robbery.

I think for most startups that haven't executed much, that's an incredible deal. Your idea that your two buddies just threw together, and maybe a prototype, is worth $250,000. Really?

(I know that some more mature companies have come to Ycombinator, companies likely worth more, but there are ycombinator companies that came fresh; so my assumption would be that the more mature companies would get a somewhat better deal than the brand-new companies. If that isn't the case, then it's possible that those more mature companies are getting the poor deal you are suggesting. But certainly for a fresh company, the ycombinator valuation, I think, is quite generous.)

Maybe it's just because I'm in a more traditional market, where people value you based on revenue, or maybe it's because I'm not that good, but it's taken me years of work to reach that kind of a valuation.

(on the upside, the valuations are somewhat, ah, less volatile in my industry. Assuming that my costs/revenues don't change sharply, the valuation of my company isn't going to change sharply. )

When I first got into Y Combinator, our company with two founders straight out of college with no prior software engineering or startup experience and a prototype calendar demo was valued at 300k.

We were ecstatic. That was the best deal I've ever been offered in my life.

I don't think I've ever heard the Kiko backstory (before justin.tv), and I hope you guys tell it sometime.

http://areallybadidea.com/34320844

You just made me throw up in my mouth a little. But I do see your point.

I saw on the news it was going to rain tonight; I didn't realize they meant that in Mountain View it would be raining money.

$150,000 in convertible debt. With no cap and no discount.

I suspect all 40 companies will take the money on those terms. You would be crazy not to.

What are the terms of the deal, specifically? How much to startups have to pay back if they take the $150K, and when do they pay it? What about valuation of the startups (ie. $150k for 10% implies $1.5m valuation)? Or is this more like a loan ($150k, pay back over X years, or upon Y liquidity event)?

Its convertible debt, meaning that whenever the startup raises the A series funding, at how much ever valuation, SV angel gets 150k worth percentage stock in the startup.

e.g. If the A series funding was taken at $1.5 Million valuation, the SV share in the company would be 10%. No valuation ceiling, no discount. Lower the A series valuation, better off SV angel are.

It means your plan IS to give some of your company away for money. Instead of holding 100%, getting ramen-profitable, working your butt off to make it.

Actually, even that isn't true. If a company were to take this money, and then never raise another round, they would simply have to pay the debt back, I'm guessing at a fairly modest interest rate.

Honestly, I'm surprised that nobody did this sooner. Hell, didn't Conway invest in six of the last round anyhow?

This is sort of like going to the race track and betting on every horse. Except at this particular race track, the horses are all above average and multiple horses can win each race.

I'd take those odds.

you almost rescued the analogy, but not quiet.

Edits welcome. Where did I go wrong?

Hmm, it's more like investing in/always betting on a solid racing stable.

You know the jockeys they use are great (investor community), you know their horses are from great stock (top applicants), you know that the breeders, handlers and trainers (advisors and partners) are THE most experienced in the area. You know the stable only enter horses into races (markets) where they think the odds of placing are good, or the opportunity cost is so low for a potential outsider.

Sure there are other stables, and sure, some of the horses in this figurative stable are co-owned by people with very different aims from you (boot strapping cofounders?), and some are backed some of your competitors.

Its exactly like ... investing in a bunch of promising, vetted business plans with motivated founders!

The clever thing about this is that Yuri doesn't have any of the due-diligence costs of Ron Conway : He's outsourced it all.

OTOH, maybe/probably Ron Conway actually enjoys the thrill of the hunt for new exciting stuff, so he doesn't consider it a particular cost.

Right now, according to the article, YC (pg) is happy about the situation : it improves their brand, helps entrepreneurs, etc. But I'm sure that they'll realize that Yuri just got in at a better valuation (on average) than they did, but they're doing all the work. Of course, they probably already have realized this, but they don't have many other options now - other than inserting 'poison pill' anti-freeloader terms into their deals...

Why is he in at a better valuation than YC? From what I read it seemed like he loans 150k for an option to be repayed in stock at whatever valuation they take their first round of funding at? YC's 30k goes in at somthing like a 0.5 million valuation, so i would assume the rounds most of these companies are taking are higher than that?

Mea Culpa - you're absolutely right on the valuation side. I think that the majority of value in a YC investment is not in the actual cash, though. And in some ways, this provides a side-by-side comparison of the difference between a 'pure money' investor and a true 'value added' investor should be getting.

Given how (YC) entrepreneur-friendly this is, there must be a whole lot of soul-searching going on at VCs and other angels now : Somehow, the private equity space just got an index investor.

You are right. No-one gets in at a better valuation than YC. Of course they deserve it, they created the whole phenomenon.

Basically he just paid $6M to have a seat at the table and be a guaranteed call when they're raising their series A. I guess that's one way to get in to the early stage game.

It's not about PR. It's about a halo effect. DST needs a pipeline of new startups to continue the web x.0 hype-cycle, so he can offload his Groupon, Facebook & Zynga. positions.

He can afford to gamble $6M on YC startups, if they will create demand in the market for his hundreds of millions dollars worth Groupon, Facebook, Zynga shares.

It's a good assymetry position to have.

If one of the 40 becomes the next google, he wins. If he can exit his DST positions, he wins.

However if the web bubble burst, he is sh*t out of luck. And DST will be a huge bagholder.

DST needs a pipeline of new startups to continue the web x.0 hype-cycle, so he can offload his Groupon, Facebook & Zynga. positions.

I don't get it, how does this help with that?

Read up on AOL's position during the .com boom.

can you just explain it?

Startups made "collaboration deals" announcements with AOL then got funding based on those "perspectives". Large part of that funding would go to AOL to buy a front-page add.

They say that the only limit to AOL's revenue from this was the amount of space on their website first page, not the number of interested startups.

Basically the valuation of the giants stayed up for as long as easy funding was available to .com's. Their spending habits, without being backed by actual revenues, were more than enough to sustain the stock prices of the few big ones selling to startups whatever they needed (ad space, big iron or aerons).

They all fell together when the crash came and easy funding dried up.

I don't see any such strings attached to this deal.

Expenditure is different this time round though, most of these startups aren't looking to blow heaps of investment on advertising and expensive offices and server costs are nowhere near where they were.

Most startups now to know that building an audience isn't enough that they need a revenue model. Many startups being built to are good fits for acquisitions by the bigger players, generally less people getting funding for things that are unworkable.

Also the public is far less adverse to sharing and purchasing online and innovations like the app stores and things like the kindle have opened up many more markets to generate revenue.

From the article: "Now he’s partnering (as an individual, not as part of DST)"

That's $6M every batch, at least $12M a year. Assuming YC classes does not expand. I think PG mentioned about 1/3 of the YC companies fail. So that's $4M in the water every year. Out of the rest 2/3s chances of being a Heroku are... actually I'm going stop here because I'm sure they've worked out all the math already.

Why stop there? How about $50k to everyone in the greater bay area with 10 slides and a business plan?

Happy times are here again!

Big money to whomever can spot the point the bubble pops this time around!

Because what he's buying (for $0) is the selection and mentoring skills of YC, and the valuation skills of the Series A investors.

Maybe the extra 150k can help lower the 1/3 failure rate.

I'm pretty sure more money can actually make things worse not better.

Would be interesting to know how many YC companies failed because they couldn't get even a minimum amount of funding required to sustain themselves and continue. Of course some of these may have just burned through the extra cash then hit the same problem.

Someone should fund 50% of YC co's $150K by coin flip so that we can get a convincing answer to this question

This is awesome. It's great to see big money split up into lots of small investments. I've always wondered what would happen if Microsoft took 1 billion dollars and make 10K $100K angel investments. Something amazing would surely come out of so many trials. Traditionally, that 1 billion (if invested in startups) would be doled out in 100 or so $10MM-ish chunks, mostly to later stage companies.

One potential issue I see is that YC companies might get complacent. I know that there are tons of factors that lead to the insane productivity that happens during YC, but I'm sure that the fact that many companies need to raise money or fail contributes.

Also, the money might keep people working on bad ideas instead of giving up and trying something new. Obviously they could pivot, but $150k gives them the ability to spend ~a year working on a bad idea before needing outside validation.

But I'm sure it'll be great for YC overall

It would go a lot farther than a year for a single founder, and even farther than that if they were willing to move somewhere cheaper than the Bay area.

Fundraising is famously a huge hit to productivity. This should make YC founders an order of magnitude MORE productive.

I think it will only separate the men from the mice.

Every YC batch should have at least 1-2 big wins. They're betting that it's more important not to miss out on those than to save a little money trying to pick the winners. A great strategy if you can afford it.

> Every YC batch should have at least 1-2 big wins.

Can you quantify a big win?

Heroku.

Actually, if we assume that Heroku's post-money valuation in their first round of financing was $10m (reasonable since they raised $3m) and that they took a 30% dillution hit each time, this would have returned $2.88m to someone that got in on these terms, or not even enough to cover the investments for that batch.

So either the homeruns have to be further out of the park than Heroku or (as is likely) the median return needs to keep things in balance a bit more.

The assumption has to be that Milner will participate in follow-on rounds for companies that look like they will be Heroku or bigger.

I wonder if there's a clause that requires the ability to participate in later rounds. That would make more sense. Otherwise it's not clear that they'd be able to. Heroku raised $3m a month after demo day; I'm not sure what it would have taken for an angel to be able to get into that round.

All convertible notes convert into shares with the same rights as the shares sold in the equity round in which they convert. These invariably include pro-rata rights.

I believe a lot of pro rata rights have minimums (i.e. you have to have at least 500,000 shares) to have that right. most series a term sheets that I've seen have set the minimums above any threshold that an angel would meet

I know the actual numbers for Heroku, and in that YC batch investors pursuing Ron and Yuri's strategy would have been net ahead on Heroku alone. And that batch also included 280 North, which has already been acquired for a significant amount, and several other startups which are likely to generate returns at some point.

How does it work out for all YC companies that have run and either exited or died to date?

I think the more controversial part of his statement was the claim that every class has had 1-2 big wins.

I don't believe that's been borne out yet.

DST is a money laundering operation. Yuri Milner is a criminal.

I can't believe Paul Graham deals with these guys. He should understand that Russia is outside of his circle of competence. His smarts are not enough to make the judgement.

Russia gets roughly $90B annually for oil and gas. Most of the money gets stolen one way or the other and ends up in the funds like DST.

Dealing

Ternovskiy had told no one he was taking the Sunday-afternoon flight out of Moscow’s Sheremetyevo airport. But when he arrived in New York he found a car from Digital Sky Technologies, the Russian company, waiting for him at the airport. From the driver, he learned that an associate of Yuri Milner was already on his way to New York to talk to him. Back in Moscow, Milner repeatedly called Vladimir, a contemporary of his in college, and urged him to get his son to coöperate. Andrey, ensconced in a New York hotel, was scornful. “Is that even appropriate for an investor?” he asked me. “Harassing and hounding are the only words which come to mind.”

Andrey Ternovskiy is the founder of Chatroulette. And the excerpt above is from The New Yorker http://www.newyorker.com/reporting/2010/05/17/100517fa_fact_...

More here:

http://www.thenewamerican.com/index.php/usnews/politics/4346...

Not unlike quantitative easing here in the USA resulting in peoples' pensions and savings being given to VCs and funds.

Indeed. All these lucrative google and microsoft stock options are eventually paid by people forced to sell their homes to pay for health care and food.

source?

http://www.rumafia.com/person.php?id=88

Usmanov is Milner's boss, it's his money.

Good general overview of Milner and Usmanov:

http://www.thenewamerican.com/index.php/usnews/politics/4346...

Gary Kasparov has been uncovering similarities between Russian state and the structure of Cosa Nostra for quite some time. He continues this theme in the today's post on Davos and the BP deal.

http://www.kasparov.ru/material.php?id=4D43D80C5EB5D

In Russian, use google translate to read in English...

This makes sense. If the money is stolen, why would one care about any cap or discount?

Looks like PG got fucked. Now, YC companies are Milner's bitches. And what a cheap brothel it is, only $6M.

> It’s the most investor friendly investment that I can think of, short of just handing people money as a gift.

s/investor/entrepreneur/

YC is now the best deal that exists.

maybe now we need a YC for new YC's

How many thousands of people apply for YC every year? Someone should offer a service: $500 to prepare you for a successful YC application.

good idea. a sort of pre-YC. could be worth it now that every YC alumni is basically guaranteed a $160k+ investment. (forgot offhand how much YC itself gives)

Hm. There are folks still using the 'old-fashioned' model of fundraising manually, building a team, honing a product and going to market.

YC may be the best deal for a crew of wet-behind-the-ears startup virgins, I'll grant that.

That was a trollish comment but I'll bite.

150k is not going to get a company very far, and certainly not far enough to reinvent the startup model completely. Building a team is still a critical part of building a YC (or any other) company, as is honing a product and bringing it to market (which is primarily what they help you do). Saying that those things aren't part of the YC model just because you get some extra free money on great terms is disingenuous.

Also, more and more experienced entrepreneurs are going to YC, because of the effects of the network and because the money really isn't that expensive. People always bring up that it isn't a great deal for experienced entrepreneurs, but you can ask my friend Steve, who just sold Reddit, went back to YC, and just raised a fat series A for hipmunk whether it was worth it.

Hm. 150K is going to get a company, lets see, 10 times as far as $15K? Probably not, but its certainly going to get it something, and fundraising is going to be an order less critical for the duration.

The YC model is something like this: Founders are recruited, then weeks are spent building a prototype whilst attending dinners/lectures about the next step: fundraising.

YC is out of the picture once teambuilding, product honing begins. Its explicitely NOT part of the YC experience. As I understand it.

To expand on my 1st remark: the shoestring bootstrap model is just one; others solicit Angels to fund development in a more structured manner. The reasons to bootstrap are usually, you are not known and cannot convince Angels to cough up. If for instance you have a success behind you, it may be possible to dispense with the grinding poverty phase.

Investing in a company based on its acceptance into YC? Hm. Also, I think this breaks the model a bit, I thought the point of the initial small(er) investment was to drive creation of a product or business model that could then expand naturally or take further investment once they've proven the products value/viability etc. I guess for some it would be a bonus, but for some it might be a curse?

Although "Paul Graham seemed very pleased" implies it doesn't, so I figure I'm wrong. Maybe it is for the better, especially when it's optional...

The model has changed. Now it's about the ability of Paul et al. to pick horses.

(Also the Ycomb environment and all that too)

Yes that's the best way of putting it. YC is seen as a vetting agent that has so much experience in evaluating start-ups now that their ability to separate the wheat from the chaff makes a deal like this feasible.

How long before a major VC steps in to offer a third round for those that get to some pre-set goal to every YC funded company that took the second round too?

High five, pg!

⁵

So this investment isn't at a valuation and the valuation is only decided at a future round at which point this converts into an amount of equity based off that valuation?

I've read about convertible notes before just a little confusing at first.

Right. $150,000 paid in advance. Whenever the company raises its first significant money (usually >=$1M) that $150,000 buys equity at the same rate the new investors are paying.

Is there any way to game this?

For instance:

1. I get $150K in convertible debt from Yuri.

2. At the end of YC, my rich friend Joe decides to invest a million dollars in my company at a valuation of five hundred trillion dollars. Yuri thus gets an insanely small slice of my company.

3. Two days later, my company buys Joe's shares back for a million dolars.

4. Now my company goes off to seek actual funding at a sane valuation. Yuri gets annoyed.

it's not worth ruining your reputation over screwing a single investor especially in a deal this small. it's a small community and even if you found a way to trick the investor in this situation, it reflects very poorly on you. i'm sure there are ways to game it, but why even bother?

yc is a small network; if one founder screws someone else, everyone knows about it. vice versa.

You're leaving out the part about getting accepted into YC and then being willing to blackball your reputation and ability to ever raise money to do anything, again.

Who would do that for $150k? To me, this is the equivalent of leaving $20 on the table to see if you can trust your friends.

I'm fairly sure that they can afford lawyers good enough to close that particular loophole.

Fair enough. I was just wondering whether there were any legal barriers built in to stop people doing these sorts of dodgy deals.

The SEC or IRS would probably consider this some variation of conspiracy to commit fraud. I'm not an American, so I am guessing.

Pretty sure the SEC is nowhere near these deals as all are private, probably under some type of 'sophisticated investor' rule anyway.

IRS couldn't care who ripped off whom as long as they get their pound of flesh.

If that happens, Yuri would be insanely profitable. Five hundred trillion dollars are coming into the company. Then all that shares are bought back. So now Yuri has substantial share of these five hundred trillion dollars. Even if Yuri's share would be just 1% -- 5 trillion dollars would allow Yuri never work again.

You probably will not be able to pull off part 3. There are duties the company has towards its shareholders. Thus, it will often cause legal problems for the company to buy out one person's stock without offering to buy everyone's stock for the same price.

That's why when companies buy back stock they tend to use tender offers that are extended towards all shareholders.

This is not legal advice. The legal issues here are more complex than this post calls for.

In the event of a funding event (or change of control), this $150k turns into $150k worth of stock at the valuation established AT THAT TIME.

Example #1: Company A takes the offer and sells for $1m in 6 months. The debt converts to $150k in stock, netting the investor $150k.

Example #2: Company B takes the the offer and raises $1m at a pre-money valuation of $3m (selling 25% of the company and establishing a post-money valuation of $4m). The $150k turns into $150k in stock at the new valuation, so 3.75% of the company.

Normally, there are various ways (discounts, caps, etc) to reward the early investor for the additional risk they are taking for investing so early.

Basically what this means is YC companies can (if they want) eschew funding at demo day, hold out for great terms, or just get busy creating value and raise money when they have more leverage. This is huge.

After reading this explanation, it's hard not to acknowledge this as a disruptive gamechanger. I mean, this completely changes the game for YC and every one of their successful applicants.

The fact that this story generates so much excitement at 10 PM on Friday night says something about the community. Good things.

I am most excited because this will mean hardware and oter "harder" things might be possible with less "baby steps" involved to get companies where they want to be - faster.

It sucks to be a graduate from Summer 2010. Missed it by 1 term.

Come now, you were admitted into a highly-competitive incubator that attracts a lot of investor attention and puts you in touch with some very valuable mentors.

The next term might be a bit better off, but it certainly doesn't suck to be you.

No it doesn't.

What would someone relentlessly resourceful do?

And the collective of the YC W'11 hopefuls just let out a wistful sigh. At least I did.

Congrats to YC and all of the startups. Sadly, I can already hear the chants of "Bubble!".

Not really, I think most of here would assume YC would in the next few years produce a solid return. Here your basically aligning youself to YC's performance instead of trying to pick which ones you think will turn out the best. Although sounds like they are still doing that additionally.

absolutely not. YC is getting their percentage at valuations of around 200-300k.

This investment will convert at valuations closer to 5M these days. So in fact they're effectively paying 10x what YC is paying for about the same stake in a company post the financing.

Congrats to YC and time will tell if it works, exciting either way.

Performance is only the nominator of what defines return.

The denominator is the investment valuation, which is significantly different for YC and DST.

There's only two types of people in the world: people who chant things and people who do things.

Great for entrepreneurs, but eventually it will be the relatively unsophisticated angels who will get burned by these valuations.

I have no problem with that, really. In 2001 it was different - everyone was playing with public money through IPOs. Now only a few quite established companies can afford to go public.

Don't be mistaken, though - this will turn into a bubble, whether you wax romantic about "entrepreneurs just do it!" or not. It always happens - it will happen again, life will go on, but it will happen.

Adding that to my list of favorite quotes.

I don't think you will have to wait long to hear that (or something akin to it):

http://news.ycombinator.com/item?id=2154902

http://www.spreety.com/ - The television guide for free tv online, free movies online, news, sports, music and more.

<a href="http://www.spreety.com/>Free Tv Shows</a> - The television guide for free tv online, free movies online, news, sports, music and more.

...and they said good guys finish last? PG seems to be proving them wrong, every day.

Remember that life is not a race, neither is investing.

HaH! Try telling Calacanis that.

Techstars is going to be unhappy about this. After one of their premier companies, SendGrid gets hit by the amazon announcement, YC closes this deal.

This is truly remarkable. Those of us yet to have submitted to YC now have an additional reason to do so. And it took a foreigner to do it. Po.iticians should take note, because this is how you stimulate an economy and innovation.

I think this is fantastic. Whether it is this $150k or the great number of startups that are getting huge funding early on, it all means one thing... it is GREAT for business and competition.

I've heard from quite a few people who say this is a negative thing and they say it defeats the idea of being a startup. My question is, why do you HAVE to start in a garage? Why do you HAVE to eat Ramen noodles for 2 years? At the end of the day, being a startup is about having a creative team and being innovative.

This is a great step forward and if it helps a few more teams create a killer product then we all win.

This turn YC into a market index.

The payment pg and company receive for this service is the increased negotiation power in the deals they fund.

Theoretically this makes entire YC batches without a single dollar invested by YC itself possible.

It was always possible - the value proposition for YC has always been the advice, connections, and reputation from being associated with them. The monetary investment is just so that founders who wouldn't otherwise be able to do it (eg. those newly out of college) can take part.

When was the last time you looked at a yc company and didn't say "Damn that's a great idea." and then follow it up with "wow that's pretty good execution too".

It's a little scary how good the yc companies seem to be lately.

I'm not keeping a tally but I often find myself scratching my head and wondering what PG et al saw in some startups.

My guess is that it's usually a bet on the people, not the idea. If you mentor a founder that eventually starts the next Google, they are going to remember that.

Convertibles with no-cap, frothy valuations, great time to be an entrepreneur. I wonder if this is going to pressure other angels into offering similar terms, and I think if they try to then ultimately angels have the potential to get severely diluted in follow on rounds. I do think that this is a great PR move. Given the hands-off terms from Yuri, I highly doubt that this is a kiss of death for other large VCs who are looking to invest in the follow on rounds, I think it puts much more pressure on Angels who are looking to get into the seed round.

Wow, big win for YC!

Unless there are additional terms at play here (e.g. liquidation preference), this means that unless YC companies raise a series A before exiting, Yuri and SV Angels won't get more than a 1x return (plus interest).

It's hard to believe the math works out here, but obviously a lot of thought and number crunching has gone into this decision. Great news for YC though!

I think that depends on how the note is written. I've never seen a note without a cap but usually it converts at the cap on acceleration. No idea how a conversion at acceleration would work if there is no pre determined valuation but it could be possible.

This really is crazy. I'm sure this will only lead to i liar deals for TechStars and others. Angel Investing needs to evolve.

Nothing stops Mr Milner from doing the same offer for TechStars companies, I guess

Wow; that's great news. Congrats to the YC companies for this opportunity!

Guess it's time to get cracking on those YC applications, folks...

There seems to be a correlation between high performing funds and how fast they move to get into the good deals, this is a very efficient way for SV Angels to move faster than anyone else. They already moved fast before, now it's a tremendous head start.

If it's a bubble, it's a cheap bubble $6M is nothing for most funds.

It's only a bubble if the world stops spending money online and every re-discovers network reality television as a hobby.

Holy shit. The word "disruptive" is overused but it's pretty applicable here. Crazy.

But is this fair to other angels/investors?

This is what I was thinking. It might be better for people trying to raise money from other angels who aren't a YC company because the new YC batch now has their boats floated for quite a bit more time.

A lot of people will hate this, but it's neither unfair nor immoral. There's nothing stopping anyone else from making similar deals, including you.

What it does do is turn YC into a market index. Interesting.

> There's nothing stopping anyone else from making similar deals, including you.

SEC Accredited Investor Status.

Capitalism happens. plays tiny violin

Less sardonically: if YC is so ridiculously superior to other investment models that investing money at these terms is profitable knowing nothing of the actual company invested in, then the system is broken. This is the market's corrective measure, attempting to come up with a better approximation of the true value of early stage startups. Might it discomfit people who made a lot of money when it was broken? shrug

My first thought is that there must be a ridiculous amount of money floating around in the capital markets right now...

That might be true, but I don't think this particular news provides much evidence either way. The total amount being invested across all 40 companies is less than many companies' A rounds.

Much like I look at "200,000 visitors! Whoa!" and think it is a big number, and you guys might think "Hmm, perhaps there was something interesting going on that second.", I think we collectively share a borked perception of what constitutes a big amount of capital.

$150k is a meaningful amount for an early-stage startup. Multiplied by 40, that is $6 million. $6 million is, seat of the pants calculation, two orders of magnitude lower than 2% of United States VC funding in a typical year. VC funding is three orders of magnitude lower than the amount of outstanding bonds in the US. That is one asset class: there are others.

Or, for another visualization: if this investment is one pixel, then the US bond market is a grizzled old neckbeard sporting six monitors at 1024x768. The remainder from that calculation might fit an iPhone, but I don't know the resolution on those off the top of my head.

Long story short: there is always a ridiculous amount of money in the capital markets.

I wasn't thinking so much about the amount of capital as to the fact that someone is willing to risk it on someone else's judgment. Money managers aren't known for trusting other people with their money; if they were, they'd be their clients. That someone is willing to do this indicates to me that he considers this "play money", a little loss leader he can dangle to get in on much bigger deals later. It's not really the amount of money going into these deals as to amount of money that it suggests is behind them.

All the amount placed into Muni Funds and ETFs is investing on other people's judgement : It's MASSIVE.

You could also look like it this way : $6mm is about how much each set of ads in the superbowl probably costs. (just guessing)

If you compare to that, it doesn't look reckless at all.

I was planning to bootstrap my new startup I have in the works, but now I think I will apply to be among the next batch of startups to be funded by Y Combinator. I just woke up to this news, and what a lovely start to my day.

Can someone explain what is a "convertible debt. With no cap and no discount" ?

That is awesome. I wish I'd made it into the winter 11 batch :(

absolutely crazy

Y combinator is doing an amazing job!

This is great for YC and the new companies coming out, congrats guys.

Wow, amazing deal. Only time will tell if its good for them or not.

Yuri Milner is a baller. That's all.

Is YC become a bubble itself?

The recession is over.

I want ask an obvious question..

We have at this point in time, the lowest rate of success or ROI of the VC industry since stats were kept. It would seem to me that any deal whereas someone short-changes the process of getting to a Series A deal for any VC or group of VCs is somewhat dangerous of destroying the very model that got all of us here.

What steps are being taken to protect the 'YC-Combinator' VC and start-up incubaor model?

No more debates about whether YC is a "good deal" because of the low implied valuation of their initial investment.

This changes the character of the YC experience. YC companies can now spend their time on product, not fundraising. On the other hand, less financial pressure may mean the founders don't learn to hustle and act less lean.

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