The New Deal
blog.ycombinator.com
blog.ycombinator.com
Either way, bravo!
> Most people don’t do YC for the financial investment—they do it because they want the advice, the help of the network, the benefits of the program, etc. But still, more money for less equity is definitely better.
This is good news for people who've issued convertible notes before YC, since the implicit valuation is now $1.7MM instead of ~$300K. This is great for PR purposes (read: bragging rights), but can also have concrete implications:
I know at least one company that had a sticky situation[0] when they were accepted into an accelerator after already raising money from an angel investor - the investor ended up owning a huge chunk (the majority?) of the company on paper, because the note converted[1]. They didn't even need the money (it was just a standard part of the accelerator).
[0] it was resolved in the end - but it caused extra headache and legal costs
[1] A well-written conversion clause in original note can also avoid this problem (e.g. by including a threshold), but hindsight is 20/20 - I know a number of companies that would have been impacted in a similar way.
I also think this is great news for what it will force other accelerators to do. Many people out there claim to copy YC's model with much less friendly terms on the convertible note. This puts everything out in the open if they want to keep up.
The difference for a YC company is that they don't have to give up an extra percentage as they raise their seed round to cover the convertible note/SAFE that they got from YCVC. With no discount, if a YC company raised at a $10M valuation that 80,000 would be worth .8% of the company - not enough to really move the needle.
The difference for the industry as a whole is that most accelerators are trying to mimic YC to a certain extent, and as YC now gives $120K straight-up others might follow suit. It's really easy to say, "We give you 20K for 6-7% because that's YC does." That seems to be almost industry standard, despite the fact that $20K for 3-5 months can be really hard to live on. It will be interesting to see how other accelerators react.
There are major differences between Incubator like YC and other Accelerators: http://en.wikipedia.org/wiki/Seed_accelerator
"The first seed accelerator was Y Combinator"
When an investor invests, he or she is buying a portion of a company. Say I invest $100,000 at a $1 million valuation - I'm actually buying 10% of the company (since 100k is 10% of 1M). There's technically pre-money valuation and post-money valuation, so the company was worth $900K pre and $1M post (depending on whether or not you're including the investor's money in the valuation), but we'll assume we mean post-money valuation for now.
A "convertible note" is someone saying "OK, I'll give you 10k now, we'll call it 'debt' the company owes me because the law makes us call it something, but once you raise your round that 'debt' will 'convert' to equity at whatever terms you set with other investors." Really it's just a relatively fast and easy way to say "Here's 10k, I'll take whatever terms you set with the next round of investors." Almost like a bit of a fundraising hack because the legal fees and time of the negotiations just aren't worth it. Sometimes convertible notes have a cap (i.e. a maximum valuation - if you go over that valuation you grant equity as if it were really a lower valuation) or a discount (i.e. I'm investing at whatever valuation the other investors set minus 20%). It just depends on what the structure of the investment is. Long story short: a convertible note is a quick investment that isn't worth much until the company raises its next round.
The SAFE is basically YC's response to a convertible note, because the convertible note carries some side effects that nobody wanted and are a bit ridiculous. There are some things that technically happen with debt, (interest, some regulations) that nobody involved actually wanted, but were a legal byproduct of calling something "debt." A SAFE is more honest, and says "Hey, we're buying a portion of the company, just not yet" - hence the name Simple Agreement for Future Equity). A SAFE is similar to a convertible note in that it has options like caps and discounts, but it's basically what a convertible note should be were we not using the whole "debt" thing as a hack.
So with regard to YC and the "new deal": YC before was basically saying, "We'll give you 20k for 7% of the company, and then an extra 80k at whatever valuation you raise your next round so that you get it now instead of later." Now YC is saying, "We'll just give you 120k for 7% of the company."
or more accurately a valuation ceiling.
It's been humbling to have Watsi working with us in our office and watching the amazing things they achieve on a daily basis. I have no doubt that amazing non-profits will continue to emerge from YC.
What exactly is the problem being solved by having a standard deal which almost everybody gets?
Now, that may be a good thing, but it also might be a bad thing. At a certain point, this is a numbers game, and you want the market to sort things out, not YC management.
What was bad about the signaling problem with YCVC was that it probably often had nothing whatsoever to do with the value of the company, and was instead just an artifact of circumstance. But other investors might not be savvy enough (or just might not have the time to think through it) to understand that that was all that was happening.
It seems like they're planning to significantly decrease that variation. Almost all companies will give 7%, and a few exceptional cases might give less. This move eliminates all signaling risks (7% is now standard, so it's not a mark against companies, and any deviation is likely upwards).
(That's a big difference from the YC batch I went through back in Winter 2011)
Yes, one day you'll look at the cap table and say, "man it would be great to have that x% to give to employees" - but very likely you're company will be in a dramatically different place progress-wise and valuation-wise, so it's a major net-gain.
Companies come into YC with nothing but wireframes and companies come in with six digit revenues. Both will exit dramatically further along, hyper-focused, and with higher valuations (in my experience). Companies that are unicorns or growing like crazy or have crazy utility get even higher valuations, and it all works out pretty well.
IMO standard deal makes things incredible simple and easy on the front end, without the massive majority of potential pitfalls (signaling, jealousy, negotiating time, etc)
If starting a business is not at least somewhat about the money, why not just have everything a non-profit?
I've gotten told this very thing, only to have a business-minded company use it to make money on my hard work and effort (you should be happy you get to work on something you enjoy..for 1/2 market value and 50+ hours/week)
No one (I think) is suggesting that you start a business without the intention to make money.
Absolutely only start a business because you are driven to make something people want, customers & users love, and to create wealth for you, your partners/ shareholders/ stakeholders involved.
My point re YC is that decision should not be made by weighing the pro's and con's of the money and equity stake you will give up for it (vs other investors for example). The investment money is a tiny fraction of the total value/ resources that YC brings to the table.
Worked for Henry Ford.
I don't know if any other accelerators had the same core + YCVC investment model, so I don't know what changes it will have elsewhere except maybe pushing valuations at the accelerator stage a little closer to the demo day amount. (Still higher than $1mm pre, in all but exceptional cases.)
(Also, WOW. The teespring guys are doing $50k for each non-profit? That is amazing.)
$120K is about the list price of two years of Harvard/MIT/Stanford . With a son who loves to program, I have wondered if sending him to a cheaper school and giving him the difference in installments after he graduates is better than paying for a "name" school. It depends on the quality of the cheaper school, of course. And I think school prestige matters more for investment banking than tech, so I'd be less inclined to suggest a cheaper school to a budding banker.
However, engineers and recruiters at the top tech companies like Google/Facebook/Amazon/Microsoft have definitely heard of YC.
This idea (first quoted sentence) needs to die. It is toxic to the early-stage ecosystem. Any amount of money is a ton of money. Period. You can ignore the hustling that Jobs or Zuckerberg did for literally a couple of thousand dollars - read Zuckerberg's contracts at the time he was at Harvard making facebook. Look at the timing jobs "Stole" $5000 from Woz and founded Apple with it (making his friend a multimillionaire in the process). The reality is that no windfall bonus from Atari of less than $4300 - which is money that Jobs had 0, absolutely 0, access to, from any other source - equals no Apple. Look at the dates.
You can also ignore what companies actually spend the YCombinator seed money on when it was $14K-$20K, at a time that the YC badge easily added $200K+ to a YC company's average valuation - a badge that doesn't bring instant liquidity. How many YC companies would not exist if YC only added its badge to the valuation, and not actually given any money.[1]
What you can't ignore is that there are people who are working a day job while owning and building a company - working that day job because any amount of money, even part of a single full time earner's after-tax salary, is a ton of money.
Just try raising it.
[1] Imagine if the YC admission read: "Congratulations! This admission is easily worth $200K in extra valuation. With the YC badge, you should have no trouble raising money. We are therefore not making any cash investment, not even $12K, but rendering only services. We welcome you to the bay area on (date)."
But that $100K? That was a ton of money.
Basically, you are wrong that it was not a ton of money, your anchors and comparisons are toxic and misleading, and if he had not cut that check then Larry and Sergey would not have created Google. That is what actual reality shows us.
You simply do an incredible disservice to all early-stage startups by talking in these terms.
I gave you several actual examples of far less than $120K being a ton of money in an early-stage context. As little as $5000 being a ton of money. I also specifically stated that if, say, $20K, weren't a lot of money, then it would make no difference empirically if YCombinator did not actually pay that cash. And YC companies wouldn't have either relied on or even actually spent that cash. But it does make a difference, and they did.
As I specifically point out: your FTE expenses are completely irrelevant, and even part (less than 100%) of the after-tax portion of a single FTE salary is a ton of money. (In an early-stage context.)
To imply otherwise does a huge disservice to all first-time, early-stage founders everywhere. The very idea is toxic and needs to die.
[1] The meaning of anchor I use is: http://en.wikipedia.org/wiki/Anchoring
[2] Your figures both about (1) the cost to the company of a fully loaded FTE senior engineer and (2) the amount that a good freelancer can generate above living expenses in a year, are irrelevant and do not need to be argued. I will grant both as irrelevant to the discussion.
* 120k will barely pay the fully loaded cost of a single engineer
* A good freelancer can generate 120k above living expenses in a year
Your response was "the fully loaded cost of an engineer is irrelevant". That's a weird argument, given that the cost of engineers dominates the expenses of early-stage startups.
You know this, so I'm not sure why you're off on a tangent about things that don't normally apply in these situations.
If I gave you $120k to start a company with 1-2 other people, and you had no other funding commitments, I don't think I'd be changing your odds all that much.
But I have no trouble believing that when YC gives founders $120k, they are changing the odds significantly.
The skills to get that big company job or land those consulting clients are pretty much the same skills you need to make your product company successful. An understanding of what people will pay you money for. Ability to execute on a project. Collaboration and communication. And of course, solid coding skills. The difference is that a product company also requires a fair degree of business strategy, determination, and sheer resourcefulness that you don't need to get a job.
So if you want to found a successful company, you're much better off developing those skills, testing them by getting a job or someone else to pay you money, and then striking off on your own. If you just get the money, chances are you will lose the money pretty soon too.
You don't have to give away anything. be an entrepreneur.
I have a roommate in SF. He's freelancing, I'm working at a company. He's making more cash than I am, but I'm working on building a company (as an employee) that's shipped multiple iterations of a category-leading product, raised $XX million in VC, and hired almost 100 people.
I'm not disputing that a good freelancer can clear $120k net of taxes and living expenses, just that that's the best path to take, if the end goal is to be an entrepreneur.
Practically every established consultancy in the US throws off numbers like that year in year out, as a routine. Which is one reason a lot of consultancies end up spinning up product teams.
And, let's be honest, $120k really isn't a lot of money. Sure, it might be more than my net worth right now—but as an engineer I could easily save up that amount in less than 2 years.
We are in a crazy scenario where we are seeking a Series A with a good product in a validated market fit.
The investors have essentially said unless you are eating ramen noodles and scraping by we are not interested.
^^ That attitude essentially rules out anyone with a family, prior commitments or debts from college/life.
Why would a funding round not earmark a portion for a fair (albeit lower than market) salary?
I have to agree with you that what is "a lot of money" is entirely relative; I don't think that $5k in today's terms is a lot of money by any startup's standards but any amount upwards of $15k or so is definitely "a lot of money" to a larval startup.
EDIT: I'm not saying this can't be achieved at other schools - I didn't attend a "name" school, but the network definitely matters and can be a huge bonus especially if you know what industry you want to target.
(Note that I'm not saying there isn't talent elsewhere, just that there's an incredible concentration of it in the top n schools.)
What's likely happening is that really smart kids at good state schools end up finding the pockets of talent there anyway.
Pretty scary implications for the value of a Harvard degree.
source: http://www.newyorker.com/archive/2005/10/10/051010crat_atlar...
Raising a venture round from Sequoia is probably a decent non-academic example of this. I would not be surprised if companies who turn Sequoia away are just as successful as those who are funded by them (although the former is probably a small data set!).
It has less to do with prestige and more to do with risk.
IMHO, there are only two routes to becoming part of today's tech elite. You either build something that gets traction or you join a team that has already done so. These are IMHO the two strongest signals today, especially given the increase of noise. Don't believe me? Just search around AngelList for 30 min. If your son gets a CS degree from Stanford or MIT, it will automatically put him in that basket of "join a team who has already done so", just as working for Google, Facebook, Twitter, etc does.
Sure, I'll be graduating about ~$140k better off than most other students. But over the lifetime of a successful tech entrepreneur that amount of money is fairly meaningless. Having spent a significant amount of time on top campuses (where most of my friends went), I often regret making that decision—the caliber of students is truly higher, and the friends/networks you have from a school like Harvard will pay dividends throughout life.
That's my story. I went to good-but-not-world-renowned state school for undergrad on a full ride. I did my best to wring the absolute most out of that experience, and it paid off in many ways, including a fellowship that paid for my master's at an Ivy. Most grad students don't get plugged into "the network", but I went out of my way to engage in campus life. In the process, I'm fairly positive I built just as good of a network as if I had attended for undergrad.
Point being, everywhere you are has something to offer. Make the most of your situation!
Glad that worked out for you.
To be clear, my school is actually extraordinarily good academically (we're privately funded by an oil fortune)—it's just that the prestige of the name and student's isn't quite at Ivy quality.
> Point being, everywhere you are has something to offer. Make the most of your situation!
I'm doing my best, and doing pretty well (making 6 figures as a college sophomore), so my regrets are more social/intellectual than monetary. Though sometimes I wonder if YC would have accepted me if I had advertised my Ivy League stamps of approval (acceptance letters)...
Maybe I'll go to Harvard when I get tired of developing and decide to "pivot" into management/finance.
I've considered it, but HYPS essentially don't accept transfers. Plus, being in New York for the next year is very helpful professionally (I currently attend NYU).
Be glad you didn't. I don't think it would have sent a positive sign. Frankly, no one wants to hear about the things you didn't do, and things like acceptance letters and SAT scores don't matter going forward.
Life is going to be filled with tough calls. Sometimes, you may have 5 promising but exclusive options to choose from. You can't make the most of the path you've taken while wasting mental energy on the ones you didn't. Take it from someone who wasted a lot of mental energy on such things before learning not to.
You said elsewhere you go to NYU -- what's stopping you from maximizing your social and intellectual opportunities?
I know (it's why I don't usually go around talking about how I could have gone to Harvard). Though it does sadden me that the VC and tech ecosystem is almost as prestige-focused as Wall Street.
> You said elsewhere you go to NYU -- what's stopping you from maximizing your social and intellectual opportunities?
Mostly that I don't have much commonality with those around me. Everyone seems to be focused on getting the "right" internship and studying, while I'd like to have meaningful conversations about intellectually intriguing topics. Plus, my general lack of social skills and nerdiness at a school which is decidedly not nerdy.
What you describe socially/environmentally sounds a lot like the typical Ivy League experience. Gossip, politics, inner circles within inner circles, who-you-know, etc.
Fortunately, social skills are something you can improve, if you set your mind to it. That's one reason I'm really glad I did my college experience in the order I did. I don't think I could have truly taken advantage of my grad school experience if not for going to undergrad someplace where everyone wasn't constantly jockeying to get ahead.
I'm sure you have more commonality with people than you think. Being adept socially is all about finding those commonalities. Usually, that means being able to step out of your own head to empathize with what other people's social needs are. The most social people I know have a way of making other people feel like the most interesting person in the world.
It sounds like you've got a lot going for you, and if you're a sophomore now, you've got a lot of time to figure everything out. Best of luck. Drop me a line if you want to grab a coffee or something. I went to NYU for my second grad school experience :)
Given that the best course materials can increasingly be found online, the only benefit of a school is its social network, in which the elite schools have a formidable monopoly.
He then became a consultant at 21 making about $500K a year, at least for a few years. Don't know what happened to him after those certs became useless, but I hope he converted somehow.
YMMV. I do think it's better to give money to people who are already succeeding and could just use a bit of acceleration or a chance to do something riskier, though. At earlier stages advice and introductions are often more useful in the long term.
If the startup (company) goes the distance then whatever equity you bought with investment would convert to your son as part of his inheritance altering the partnership drastically.
The legal and financial ramifications can be quite complex.
LP is Limited Partner, basically an investor.
A safe is like a convertible note but better. http://ycombinator.com/safe/
The real benefits of YC though are the focus it brings you, and being able to get access to the YC ecosystem. Oh, and being able to attend Demo Day, but with so many companies in the YC program, I think Demo Day isn't what it used to be (I think you get 90 seconds now?).
We would have loved to have had access to those resources, but since we had already invested far more into our company in terms of cash, it's hard to justify giving up that much equity for so little. Kudos to Sam for the new program.
If you have no product and no track record, it's definitely worth it.
If you have something working, but growth isn't amazing, it's a risk because there's a chance you don't get the absolute most out of demo day due to timing -- so one might feel what you describe. That said if you blow up later, I'm sure they will do a fantastic job of getting you to the people you'd want to meet with - eg. Homejoy.
But if you come into YC with good growth (like doubling in size every month) it is without a doubt one of the smartest things you can do. You will probably never have as much leverage as you get while going through YC.
Stepping back a bit, it's also a sign of the times -- especially given the tone of the last paragraph, it's clear there's pricing pressure on incubators/accelerators and the competition is heating up a bit. There are more competitors in the space, valuations are rising, and YC is adjusting accordingly. This isn't a good or bad thing per se -- just an observation of a byproduct of capitalism and the realism of the market in 2014.
Unanimously positive move.
In fact, I always held a pretty negative view of YC's prior low valuations. It struck me as PG monetizing his (admittedly, well-earned, because his Lisp chops are really strong) reputation, and the low infusions, to me, indicated that the target audience was young people without families.
I'm afraid to say this, for fear that people are thinking I'm losing my edge by saying something nice about an investor, but I actually like Sam Altman so far. I think he's making a lot of really good decisions.
To me, this kind of connects to the debate on employee equity that's been ongoing. Sure, intellectually we want to equate that with upfront salary and then compensate at the market rate. But in reality it can never be that way for a plethora of reasons -- tax concerns, option rules, difference in equity classes, etc.
Again, I don't really know what I'm talking about, but I don't think people should view equity as dollars. To me, equity is better thought of as an entirely separate finite resource of a company. One which has different value to different people, depending on ability to take on risk.
Besides, at this stage, no company actually has a value. Companies have a probability distribution of possible values... and it's a very diffuse distribution.
It does seem though that the primary aim here is to provide more for living expenses, which means that the $1.7m implicit valuation might need to be taken with a grain of salt. Not that it matters much anyway.
; YC, financially, is enough money for you to live in the Bay Area to work on your company for a fixed time in which you're expected to grow and acquire more capital and a probability assessment on your potential future value.
Keywords, 'potential' and 'future'.
You can't up and sell your company for $1.7M, Sam Altman can't, no one can because no one would buy it because YC isn't saying "You are now in possession of, and operating something, that is worth $1.7M to the world." At such an early stage, all they're really saying is, "There is a probability that your company will be worth $1.7M, and the probability is high enough such that we're willing to put our money where our mouths are."
$17k is what two engineering students might have made at a summer internship in Boston in 2005.
$120k is now what two entry-level engineers might make in six months in the Valley.
[Edit 1:] Thanks; OK. I had read it as potentially indicating the money came at two different times rather than just from two different sources. All clear now.
If yc does 5 nonprofits per batch, $500k is not a lot of money.
Note to founders - this is the kind of thing you can do when your startup makes money!
Not that $20k is a huge difference, but it seems like the dividends from funding a YC non-profit for nearly any player in the tech scene far exceed $20k.
I believe this is the agreement: http://ycombinator.com/documents/YC_CSPA.docx
It's how many VC funds are structured. General Partners run the thing, while Limited Partners are investors with limited liability.
Read more about it here: http://en.wikipedia.org/wiki/Limited_partnership
Feel free to comment (it's not very intensive in terms of VC deal terminology, but I wanted to give RG a spin).
(1.5 mil vs 300-ish k previously)
So, do you provide personal expense guidance to the founders?
How can I get, without joining YC, just this portion of the program ;)
I know advice is a big part of it but this is a exaggeration right? Most of that network/benefits/etc that surrounds YCombinator is about the financial investment.