This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS). I wonder how this will impact the decision to raise money after YC.
0 - Including paying the founders a reasonable salary
0 - Including paying the founders a reasonable salary
> 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).
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.
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.
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.
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%).
> Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
See the footnote:
"Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors."
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.
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.
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.
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.