Advice needed: is YC worth it at their valuation? | Hacker News Reader

Advice needed: is YC worth it at their valuation?

18 pointsycpotential30 comments

I just heard from YC that they'd like to fund me. Woohoo! But I need your advice, especially from YC alumni...

My startup is a little over a year old and has earned a more than $1m in profits since its inception. Based on basic math, its valuation is well above $1m, but let's assume it's $1m. I was expecting YC to either reject me, or to say that they'd fund me at around 10k and expect 1% in return.

The YC offer though is for around the same amount but for 7% at a 200k valution. Now I know the logic of rational decision making and how if an option seems like it is likely to benefit more than it's likely to cost, you should go for it. But at the same time it also seems like an unfair valuation.

I imagine others have been in a similar situation and that others will be either today or over the next few days. So this discussion will hopefully help many others. What does everyone think?

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Perhaps it might be useful for you to think of a business broker as an analogy.

A broker takes 5%-10% of a deal. They can charge that much because clients with the broker they can get more then 5%-10% more on the sale. In residential real estate, it's the same sort of idea with smaller percentage.

There are two numbers that mark the top & bottom limit for any price. One is the maximum buyer would pay if he had no alternatives. In a business environment this equals the total amount of return he gets for it. The second number is the minimum a seller would accept, this is usually cost of production.

In a competitive market, the price is usually close to the second number. We are used to prices being like that in our normal lives as consumers.

In a broker situation, the price has less to do with the second number & more to do with the first, the value to the customer.

You need to figure out if what YC has to offer is worth 7% of your company. If we assume that your goal is an exit, this could be making an exit ultimately happen more quickly, at a higher value or more likely. It doesn't actually need to be that much higher, faster or more likely to be worth 10% of your company. YC might be getting an awesome bargain, but that doesn't mean you loose.

One more thing.

Thinking in terms of valuation here is slightly problematic because it is only based on the money being invested, not the other things. Since you are already profitable I assume that if it was just cash, you wouldn't be considering it at all. If YC offered you $0 for 3.5% of your company, you'd probably prefer that deal. This values your company at $0.

I wish they actually did that. Some of us don't need the money.

My startup is a little over a year old and has earned a more than $1m in profits since its inception... Now I know the logic of rational decision making and how if an option seems like it is likely to benefit more than it's likely to cost, you should go for it. But at the same time it also seems like an unfair valuation.

I'm clearly missing a big part of the picture here: What do you expect to get out of being a YC company?

Hell no, if you are really clearing 1m in profits a YEAR, why would you take 15k and give up 7% of your company? That is absolutely ludicrous. Either you are overstating your companies financials or PG is trying to ream you. I find it hard to believe that you run a company with 1m in profits a year and you have to ask this.

If YC is funding many companies that are already at this stage, they are pretty far from what I understood the company to be.

If you're a year old and earning a million in profits you should be looking at a larger (VC) round.

Or none at all.

If you're earning a million in profits, then why do you need additional investment? You're wildly successful with your current capital structure.

My point was that you have a choice. If you're so wildly successful that you think you can be the next google, then you can go for VC money to finance even faster growth.

Or you can forego funding completely, but you're probably settling for a slower growth rate then.

What does a 1yr old software company need that it can't buy with $1 million of cap-ex?

If only there was some sort of organization dedicated to helping young companies mature and raise VC money...

I would give YC the same amount of stock for $0. That is to say I'd give them advisor shares just to be involved. That's pretty common.

That makes this whole debate irrelevant. It is worth it.

What does everyone think?

That this post is a mistake?

I couldn't agree more. I almost wonder if we're getting trolled..

1. Maybe the poster is confusing profit with revenue?

2. Either way, it sounds like a bad deal..

3. And whatever the deal, you never want to discuss publicly until a contract is signed.

4. And of all places, especially not on the forum run by the VC..

The whole story is almost too crazy to believe.

Yep, no one who has built a company that turns up $1M in profits, revenue, or event debt shows the same business mistakes as those in the post. Really, unless you have made a very specialized scientific or engineering product and sold it to one mega research lab for that much, you should have had enough business sense by now to know NOT to discuss deal terms in this manner. This is strictly something between you and your advisors/mentors.

Unless, of course, the posted already decided to reject the offer but wanted to capitalize on it with a publicity stunt.

Two other things.. You would assume the individual would already have a hacker news account by this stage in this process, not one created 3 hours ago.

Also, why not provide more details such as a name or url if you're going to drop the "7%" figure. Your identity is already blown.

Perhaps someone is questioning the value/integrity of the YC concept rather than the monetary values.

Profit, or revenue? It takes an awful lot of revenue to come up with $1m in gross profits.

Congratulations both on your success and the offer.

The offer from PG is in the range of what they do, seed capitol. I imagine that they have x capitol allocated with y slots and they needed to squeeze in your deal.

The important part from my perspective is the guidance and connections. No you probably don't need the seed capital.

But you may benefit tremendously from the guidance and connections. You could easily give away 7% or more to board members for guidance and connections that probably is not as good as you would get from PG and YC.

If I was in your position I would ask how they think they can facilitate growing your companies position in the marketplace. If they can setup some great meetings that have the potential to grow your business. And these opportunities are beyond your reach it is most likely worth it.

If the contributions in guidance and connections only benefit you as a 5% increase in sales and a 5% in savings it is still a net win. I would expect that in the worst case it would be significantly better than that.

Since inception? How old is it? Are you earning a million dollars doing what you're going to continue doing (i.e. is it three friends who were freelancing for a couple years and have a product they'd like to sell, or have you been selling a product to make that money)?

And why are you treating YC as just a cash investment? They've always claimed that the most valuable thing they give is advice, so you have to ask what that's worth, too. Consider it this way: you're giving up 7% of your company in exchange for the chance to pitch to far more investors, on far better terms -- if your numbers are as good as you say they are, you might find that the deal pays for itself on that basis.

Well, knowing that you applied to YC in the first place, you must have thought on some level that they are more experienced and/or better at making these kinds of evaluations than yoursel(f|ves).

I would at least be interested, then, to hear from YC why they gave you such a low valuation, just to be sure you're not missing something important. Then you can make you're own decision as to whether YC's logic makes sense or not.

No useful advice for you, but as a noob, I was under the impression YC gives everyone the same standard offer to everyone. Has that changed?

The money they give to everyone is the same, but the percentage varies: "We usually invest $11,000 + $3000n ... in return for between 2% and 10% of the company. The average is 6-7%." (http://ycombinator.com/w2010.html)

negotiate. you can negotiate anything.

In the past, PG has said that YC doesn't negotiate funding -- that it's strictly a take-it-or-leave-it offer.

When you have $1 million in profits, people negotiate with you.

No, YC isn't worth it at that valuation, especially when generating over $1m in profits. You do not need YC with those profits, if anything YC would need you. You can use your revenue to advertise the service on your own. Whatever you do, don't agree to those terms.

What industry are you in?

Ur answer shows clearly, what big mistake the YC guys did. If they just want to be in Ur company, they should've asked U that for free. I think if PG comes to some one year startup and says "Hi, I wanna be in Ur company for 5%" nobody will throw him out. But now for U it is not about that fact that U want him in Ur company, but about Ur pride about Ur "child" (meaning Ur all heart investment for the last year).

I can't give U an advice, U have to know by Urself how much Ur pride is worth to U. I still would take the deal but would make clear that I didn't take it because of the money.

But I can give an advice to the YC guys: Don't bring new creteria into a deal U nearly have closed. New creteria are for deals that U can't close without some new leverage.

All of that includes the assumption that I have all information nessesary about the deal. But actually, nobody has but the topic creator and the YC guys. So, don't take my words too seriously!

PG is low-balling you. A 200k valuation for a startup that has already earned $1m in profits (I'd assume over several years) is absolutely ridiculous. He's trying to capitalize on his name.

I assume you're not pressed for cash. The $14k you would get by PG/YC buying in is a drop in the bucket compared to the $1m you've already earned. The main value is the YC/PG brand name.

This is not a traditional VC deal where the main benefit of the startup is cash to survive/expand. Instead, you're giving up 7% of your multi-million dollar company to get the PG stamp of approval.

Not sure what industry you are in and whether the name would be worth it. I'm leaning towards no though.

If you want to seriously consider it, get a valuation done and see how much it's actually going to cost you in lost equity. Test the waters as well with angel and VC groups.

PG is low-balling you. A 200k valuation for a startup that has already earned $1m in profits (I'd assume over several years) is absolutely ridiculous. He's trying to capitalize on his name.

Remember, you only heard one side of the story, and there are plenty of question marks around the $1MM figure in profits.

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