Hacker News Reader

Comment by debacle | Hacker News Reader

What kind of messy things happen with 150k that don't happen with 80k?

It's a matter of degree. In the old days, when a startup fell apart, the founders would just go their separate ways. When every startup got $150k, sometimes they'd end up fighting over the carcass instead. Our hope is that now they'll fight half as hard.

I would have assumed that the startups would pay whatever they had left of the $150k if they were folding?

Or are you referring to cases where at least one founder wants to continue?

Out of curiosity, what does the 'carcass' usually consist of? Wouldn't any leftover money go back to investors? Or does that get divided out to founders (seems like that would be a bad incentive). Or is it mostly related to the product (domains, code, etc..)?

Technically if a company were to dissolve, its assets would belong to shareholders (investors, founders, YC, etc.). In practice, though, it's rare for everyone to agree to dissolution while there's still money in the bank. Instead, you have a guy who has given up arguing against a guy who wants to put in a few more months. Less money in the bank means less arguing about "another pivot" vs. "let's just move on to new things".

you have to understand that YC & the start fund has little to no control over the companies, except perhaps moral authority.

YC has common shares (and a small minority at that) while the start fund is arguably even worse off with a convertible note.

so, if the founders decided to, they could just pay out the rest of the money as a bonus. immoral? yes. illegal? i don't think so.

Besides, there are plenty of now very successful founders that didn't have any of the luxuries that we have with StartFund. Somehow they have survived. Survival of the fittest is a good thing.

I seems weird to me, like the whole debt component of the convertible note pretty much ceases to exist unless it is able to be successfully converted to equity.

I guess investors of the type investing in start fund tend to think of it more as a gamble that only converts to anything if the company raises and don't care much about recovering relatively small bits and pieces in the even the company fails.

A Start Fund investment comes with a buy-in for next round. Don't think they're planning to generate huge returns on the initial investment, it will get diluted eventually anyways, but a buy-in gets its participants the front-row seats on next Dropbox and Heroku.

Definitely illegal. http://en.wikipedia.org/wiki/Duty_of_loyalty

Thought I'd doubt it would be litigated, unless the founders are particularly stupid in addition to being immoral.

I don't see how fiduciary responsibility holds if the company is in the process of dissolving.

There is also the trap that if you have a little too much at the beginning you might fall into the trap of overbuilding thinking that you have "the time" instead of being obsessive about actually making money.

I think the assumption is that only the most colossal implosions happen in the first 6mo after YC. It's much easier for 2-3 people plus 1-2 hires to burn through most of $80k in 6mo after YC, vs. 150k. Figure founders consume $3-4k/mo each, and hires cost $10-15k, and you spend $20-30k on corp/legal/etc.

I was asking specifically about:

> it sometimes caused messy disputes in the unsuccessful ones.

I can't imagine a dispute that would occur at 150k but not at 80, except maybe of the cut-and-run variety, but the same could be said of any dollar amounts - you need to know when to cut your losses.

The dispute happens after some of the money is burned off. Only very exceptional people get divorced during their honeymoon. Assuming a constant burn rate, there's much less money left when you start with a smaller pile.

(and, virtually anyone who can get into YC is passing on a $10-15k/mo income opportunity by just getting a job somewhere. Fighting for 1-2 mo of wages makes less sense than fighting for 6-12. The dispute would happen anyway, but it's not worth fighting if there's only a small balance left.)

"Free money" is dangerous, it creates something like a moral hazard in early stage start-ups.

The companies get into a habit of spending more than required on everything.

VC loses $70k

VC loses half the equity they would get otherwise..

The equity is insignificant, specially for the top startups. What those 20k buys the VC is first-hand knowledge of what is going on with the company and (hopefully) a better chance to invest additional money when/if the company takes off.

Of course, though it's still half of what they'd get before. That is better for the startup. Don't take more money than you need, unless you're getting a really good deal - though then you could burn and piss off VCs and may look bad during future rounds.

Reply on news.ycombinator.com