YC’s $500k Standard Deal
blog.ycombinator.com
blog.ycombinator.com
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.
0 - Including paying the founders a reasonable salary
See the footnote:
"Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors."
> Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
That's... almost unbelievably founder-favored, yeah? Neat.
The company gets the money now.
The more they grow, the less YC gets for the 375k. But the more they grow, the higher the value of 7% is going to be. And also, the more they grow, the more they are likely to grow in the future. So the 375k share is also more likely to keep growing.
So in a nutshell: the 375k is incentive for the company to grow, which is also in the interests of YC, since they have 7% (+ x%) and in general getting startups to grow is the whole point of YC.
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%).
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.
> Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
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.
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!
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).
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.
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.
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.
And I am sure they wouldn't sue you for it.
Not raising again doesn't even violate the expectations of the program.
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.
Pragmatically, to get to A, you need to make different decisions that don't always work out - and feel scary to those involved a lot more.
It's why higher risk usually correlates to higher returns (if it works)
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.
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.
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.
What makes you say that?
I don't know those answers, just wondering in the hope that someone from YC comments on that.
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.
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.
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.
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 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.
Most sane people just don’t do startups though if they are in that position.
At a total spend of $250k/yr if you can figure out how to bring in $150k/yr of revenue ($12,500/month) you've got 5 years of runway now.
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
To sell a solution, first create a problem ;)
A startup on demo day raises $25m post.
7% on 150k means it's 11.7 multiple.
And 7% on 125k means its 14.7 multiple.
That's +3x jump on every deal.
Now let's say company exited at $1b.. the difference in multiple is +100x!!
Give that person a raise YC, whoever suggested to go down to $125k.
As somebody else has suggested below. This 375k is mostly cheaper way of buying prorata at series A
It's still a no-brainer for any founder, regardless of batch size or remote vs in-person. This new deal simply cements that.
Well done to the YC team.
This was much more a value when there was only a handful of companies in each cohort. Now there's 3 groups:
* YC~low number~ that I've heard of: Original signalling value
* YC~low number~ that I've never heard of: zombie
* YC~high number~ : new batch of spray and pray
This is unfair but my initial reaction
*you in the general sense, not you specifically :)
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.
> 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.
$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).
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.
> 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.
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."
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?
https://blog.ycombinator.com/yc-summer-2021-batch-stats/
* 50% are based outside the US * 70% are not B2B/Enterprise * 43% of the batch is white (less than half)
So…your impression is simply incorrect. YC doesn’t fund the companies you think it does.
"(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.
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.
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 ?
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.
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.
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.
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
https://www.bloomberg.com/news/articles/2021-05-21/what-s-th...
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.
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.
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.
Please tell that story.
> 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?
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?
As someone else said, please tell more!
I'm far from an expert, though, so you should email apply@ycombinator.com if you have specific questions.
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.
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.
If you join YC now, there's a much bigger likelihood you don't need to touch VC money (excluding YC itself, of course).
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.
Some of the borrowing is indirect.
Let’s say you have a portfolio that includes property. Inflation is high and the current 15 year interest rates are low, so you might increase your mortgage to the maximum. You then put that money into other investments, including VC.
This opportunity is even available to many home owners in the US.
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).
Well there certainly isn't any explicit limit either.
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?
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.
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?
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.)
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
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.
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.
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.)
So the first tranche values your company at 1.78 million; if, afterwards, you raise more money at 6 million valuation, YC gets another 6.25% for 375k.
Correct me if I'm wrong.
This is extra pro rata.
Companies get to keep their acceptance a secret until they’re ready to publicize it. There are many more companies that haven’t announced yet.
*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.
https://blog.ycombinator.com/early-deadline-for-yc-winter-20...
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).
Doing a deal with YC never excludes you from doing a separate deal with someone else as well.
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 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.
You would prefer to take:
VC: $20M Valuation - $3M Invested
Angel: $12M Valuation - $150K Invested
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
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.
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 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.
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.
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.)
House prices (on 5:1 leverage) are up >100% THIS YEAR.
The S&P is up ~30%.
You need a ~20% return saving ~$300k per year to get >$2M in 4 years. This wasn't terribly difficult to get in the last 4 years.
Who knows what the future will bring.
Disclaimer: I work at Meta
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.
It was originally 5k plus 5k per founder. The first time it changed was summer 2011, with the guaranteed additional 150k funding from Yuri Milner and Ron Conway.
source: https://www.newsweek.com/boot-camp-next-tech-billionaires-10...
https://venturebeat.com/2011/01/29/yuri-milner-and-ron-conwa...
The tech product world is just more mature, and more mature leaders and developers are required as a result.
That's been adjusted up so that YC invests $125,000 for 7%. It still feels really low these days.
I've heard of VC firms investing 3-5 million for 10-20% in seed/series A with no seed [1, 2], which seems like a much better deal. Lots of room for growth before giving up more equity.
Which VC firms are investing like this, and how do you connect with them if you're outside the bay area but already have a product with significant growth?
Or, contrary to this, does YC offer value beyond monetary that makes the investment worth more than the alternatives?
[1] https://web.archive.org/web/20200817011057/http://www.apollo...
[2] https://news.crunchbase.com/news/seed-funding-startups-top-v...
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.
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.
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.
Trying to raise capital for hard science (besides rockets and quantum apparently) is a real drag. We went to DoD contracts instead.
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%.
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.
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.
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.
[0] https://medium.com/bloated-mvp/how-to-sanity-check-your-star...
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.
We got acquired and I did well anyway but regardless...
The criticism here is that you need to give up a higher % of your company down the road.
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.
I was recently screwed over as an angel investor in a SAFE deal where the startup got acquired before their Series A, and I was just completely out of luck. "Thanks for the money, sucka" said the startup. Not verbatim, but that was the idea. Startup got the seed money, founders got the acqui-cash, angel investor chumps got nada.
As to debt, you might want to read this: https://www.upcounsel.com/safe-notes
"Startups may prefer SAFE notes because, unlike convertible notes, they are not debt and therefore do not accrue interest."
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.
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.
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.
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.
I'm in no rush though.
- [0]: https://twitter.com/Neuenet | https://neuenet.com
- [1]: https://twitter.com/beachfront_
- [2]: https://handshake.org
The privilege is assuming that your experience with SWE projects maps to everything worth doing.
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'm not interested in learning about SAFEs or cap tables or any of that. I'm interested in running profitable businesses with basic P&L statements and not owing anyone anything.
If you immediately value my business at $1.7 million, I should probably in the next 12 months be making $1.7 million in revenue as a baseline. So how is Y Combinator going to help me do that?
Engineers are expensive. How is Y Combinator going to help me sell my product and grow so I can pay my staff?
Why would I not just take a bet on a PR firm[1] since advertising is a total wash for small businesses?
[1]: http://www.paulgraham.com/submarine.html
Edit: I'm very happy for you that you think SAFE and maybe valuation cap, discount (without context), MFN, pro rata, "high resolution fundraising" are basic terms, but for most US citizens they are not, and for non-US citizens even less so.
Y Combinator goes to great lengths to attempt to describe these concepts, at least one of them they introduced and didn't exist anywhere else in fundraising prior, but they go to little to no lengths to explain how they will help you grow your business.
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.
[1] https://en.wikipedia.org/wiki/Entrepreneurship#Bootstrapping
Then YC isn't for you. They want people who are interested in learning about cap tables and SAFEs.
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.
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?
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.
> 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.
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.
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.
It may be written into the terms some other backup for this situation.
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.
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).
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.
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.
Guys, after reading the first lines of the blogpost I seriously thought for the first time I could take the leap
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].
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.
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.
Let's say you exit 1 year after YC at a $5m valuation
With the MFN, does that mean that YC get 28% of the sale instead of the initial 7%?
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?
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.
S.A.F.E = Simple agreement for future equity
It's like a "preorder for investors"
are these procedurally generated by a professor at Stanford who masquerades it as an industry term during the latest semester?
the show Silicon Valley has a few jokes about that
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?
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.
its not really about just the MFN explanation anymore, thanks for the one potential synopsis on that particular concept
Is this forced evolution due to other VCs entering the early stage market?
https://www.nytimes.com/2017/11/05/world/yuri-milner-faceboo...
Also the total funds at the time was ~$150K, aka roughly what YC was doing before this announcement: https://techcrunch.com/2011/01/28/yuri-milner-sv-angel-offer...
(I believe the history is that at the time, YC didn't have the free cash flow themselves to invest in every YC startup).
I see mention of 40k/founder/yr - imo that leaves out the huge demographic of folks with kids.
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?
They made it work with $125k, I don’t understand the push back with 3x as much money.
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…
> 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.
NGiNX https://en.wikipedia.org/wiki/Nginx
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.
MySQL https://en.wikipedia.org/wiki/MySQL_AB
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.
Also shows additional confidence in selecting a winning cohort.
Can they update the MFN to post YC acceptance date?
If I take early money I now have to give YC a super good deal too.
Incentivizes not raising money before YC.
"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."
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.