MFN Clause: In a most favored nation (MFN) clause, if subsequent convertible securities are issued to future investors at better terms (e.g., a lower valuation cap), the better terms will automatically apply to the investor's SAFE. This clause falls away on conversion of the SAFE into company stock.
Its a Simple Agreement to Future Equity. It's a fundraising instrument where the investor agrees to give the company money in exchange for some amount of equity to be decided at a future date. It's designed to make it easier for founders to get capital at the early stages without having to negotiate valuation.
Prior to the SAFE, a lot of startups raised using convertible debt, which had a bunch of strings attached (convertible notes typically have an interest rate, a cap, and a discount). SAFE was an attempt to make this simpler and more founder friendly.
The best thing to do is to actually read SAFE templates, they are self-explanatory. Pretty much now these are standard instruments for early-stage investing for everyone, not only YC, so investor or founder you’ll see them a lot.
MFN, at least, is a standard and common term-of-art in contracts and can apply to all kinds of things where a party wants to guarantee that no one else gets a better deal.
> is a standard and common term-of-art in contracts
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?
I'm pretty sure that the "most favored nation" term goes back to international tariffs.
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.
You think? I actually have the opposite impression. This takes away control from the founders and makes it harder to precisely control dilution, which is very important at the early stages.
A SAFE without a cap is nice though for an early company, especially if it's optional. A SAFE like this means that you're effectively raising at a Series A valuation but during your pre-seed stage. The most obvious effect of this to me is that it will gives your Series A investors a little less, either that or you'll take more dilution at Series A if your investors won't budge. Is that what you mean by "precisily controlling dilution"?
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're looking for such fine-grained control over dilution that $500k is an untenable amount of cash to take vs. whatever YC was paying before, you might just want to skip YC.
You have $375k extra runway to increase the valuation of your company. If you are increasing the valuation enough, then the extra runway is worth far more to you than the dilution costs you. Without this deal, a 375k seed would likely cost you far more dilution.
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.
I think YC is great for founders (I actually went through a batch many years ago), but it's worth mentioning many of the startups are not really that early. Some were going straight to an A round instead of a seed round, many (maybe most) had already raised money, some had already raised money at significantly higher valuations.
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.
Do companies that already have millions in revenue (or feel that's inevitable) get the same terms? It would be interesting to see who accepts that — they probably see something worth it in YC to give a discount on equity.
I went through YC years ago so maybe it's changed, but at the time I think it was ~1 company per batch would get better terms. In other words, it wasn't negotiable. This wasn't baked in, their stance was "we don't negotiate" and only in truly extraordinary cases would they make an exception.
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.
I don't understand at all. I know nothing about startups - so is it an additional 7% that YC owns for every additional 125k, so 28% for 500k? Disclosure - I did not watch the SAFE video.
Roughly: The additional converts at the best deal another investor gets at/before the next priced round.
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.)
It took me a second to work through. Basically, they just said they will always do some of their effective pro rata. So more weight on the cap table. Hopefully it isn't required, bc sometimes there isn't a lot of room, and their value goes down the further out you are. But for weaker companies, for helping their rounds kick off, can be good.
Yep, and apparently forced bc they give the $ on day 1. That's a lot of %, and before most founders understand what is happening, esp. in their target demographic....
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
Not quite. The way that it works is that the 375k is invested now, but at terms that are determined in the next equity round. If the next round values the company at 10 million, then the 375k would be 3.75% of the company.
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.
This is also not true. Their uncapped MFN note assumes the terms of the lowest-capped safe (or other investment) after their investment. So if founder accepts $3.75m capped safe soon after YC’s investment, then later raises an equity round at $10m valuation, YC gets 10% more, not 3.75% more at that time. There may be dilution from the equity round but that’s a different matter.
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.
They are correct. The MFN safe converts at the best terms. So if there is a SAFE with a post-money $3.75m cap, then even if the next round is priced at $100m, YC gets 10% at that 100m valuation. It converts at an equivalent ownership compared to the cap. That's why caps exist.
The MFN applies to other SAFEs too. YC will get the "best" price during the priced conversion. If you took other money at a lower SAFE, that would peg the "best" price in the conversion -- and thus, that's what YC's $375k would get.
Thank you for the correction. They mention this at the footnote of the article: “1 The $375,000 is on an uncapped safe with ‘Most Favored Nation’ (MFN) terms. MFN means that this safe will take on the terms of the lowest cap safe (or other most favorable terms) that is issued between the start of the batch and the next equity round. Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.”
I'm also confused about how this works. If you choose to never raise after YC, is the remaining $375K just part of of the 7% they take upfront, or is it only available if you raise?
> Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
You get the 375k now, it is not part of the 7%. The incremental % they own wouldn't be determined until you raise again.
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.
If you can build something with 500k and grow at VC-expected multiples without raising again, I'm sure that'd be a pretty positive conversation to go have with YC to determine the equity attached to that additional 375k!
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!
(c) Dissolution Event. If there is a Dissolution Event before the termination of this Safe, the Investor will automatically be entitled (subject to the liquidation priority set forth in Section 1(d) below) to receive a portion of Proceeds equal to the Cash-Out Amount, due and payable to the Investor immediately prior to the consummation of the Dissolution Event.
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).
There's no maturation date on a SAFE. This is all in the "User Guide" YC publishes for these instruments. The text of the SAFE refers to it as a "converting security". I'm sure there's an important distinction to be made here, but for the purposes of this discussion: if you never raise a round, the issuer just gets their money back (if money is to be had after senior claims).
If you never intend to raise again after YC, I'm pretty sure that would be defrauding them. YC expects that you build VC-scale companies which require several rounds of additional funding, anything else is a failure, if I understand correctly.
Explicitly misrepresenting your intentions would be fraud though. I'm not talking about a company that intended to go big, but didn't quite take off. I'm talking about a founder who never intended to go big (keep a small bootstrapped company all the way), but applied to YC claiming big ambitions anyway, just to get the initial $500k check.
That depends a whole lot on a lot of details not presented, I believe.
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.
They already have exactly this issue (not that I think it's a big problem), if you apply to YC and convince them you want to build the next Slack, but in reality you just want a comfortable life for a few months, that's entirely possible already.
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.
You are getting downvoted to invisibility because YC doesn't ask you to raise again. You likely need to have the kind of company that could plausibly do so (ie, an idea that can scale), but lots of YC companies don't, and no YC process I'm aware of prods them to do so.
Not raising again doesn't even violate the expectations of the program.
Note on one point - technically it doesn’t require multiple rounds. For early investors, the fewer rounds before a large IPO, the better. If you made it huge and IPO’d as a billion+ dollar company with only the YC funds? YC would be thrilled
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.
It’s about perceived possibilities and decision making really.
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.
Do you think the idea that popped into your head after reading this is something that didn't occur to them? A couple of YC companies have not raised additional VC rounds after YC.
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.
>This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS).
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.
Yeah no one talks about the cost of engineering. Most quality engineers are looking for $150-$200k salary to start. So a team of 5 is easily $1m after benefits, not to mention any equity grants. And that’s before the founders take a salary, before they hire any designers, or marketing, or sales people. The cost of starting a tech company is still low relative to other fields, but it’s increasing drastically.
Yeah I agree to an extent. Founders need to get the business to an MVP and some revenue for B2B SaaS. But if you’re growing at any attractive rate, you’ll outgrow that very quickly. It’s that next step that becomes more difficult when hiring engineers. That’s typically your seed round. For example, let’s say you raise $3m. That’s a nice amount until you realize you need 3-5 engineers that are all an average of $200k/yr fully loaded.
Seems nobody is really investing in that scenario. With modest, to low investment, there should also be very modest returns. By that, I mean taking less to extend runway, but then also have it all pay very nicely on take off.
The founders would need to be able to build the product themselves. It will be challenging, for sure, but I know about a dozen founders that have done it with less.
Not all companies are based out of SF. For companies in India, it easily scales to 10-15 devs. You could get to a 2yr runaway with a small 10 people team.
YC has to react to VCs entering early stage investment. Accel in India grants upto $250K to startup founders (no strings attached) [0], while Sequoia seeds select startups with $1M in capital [1]. In India, $250K's roughly worth what ~$4M would be in the US.
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).
A startup I was at had plans to apply to join YC but then pulled in $4.5m in funding as a seed round. There's just so much money out there right now, I can't imagine giving up 7% for what amounts to pennies.
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.
YC’s value is still in the networking and signaling aspects.
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.
Reputation boost amongst who, where? You partially answered that in that VCs, arguably who you're likely wanting to impress with your associations, likely take the YC connection with a grain of salt?
Accel's $250k deal does not appear to be a grant, which is truly no-strings attached money. It looks like a convertible note with no valuation cap; so non-dilutive until the first priced-round.
Going by my memory, when YC started they invested 5K per founder. It was, either by accident or design, focused on 20-somethings eating ramen and dreaming big. You could not do much else on 5K.
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
> Does this signal that its harder to find those young hungry geniuses? Or that other stages of life are now predominating?
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.
> A couple founders eating ramen could very easily launch a new web product back then. Now it’s tough to get recognized
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 overall value of a software engineer is higher now than in the past. I think companies recognize this and are paying for it. An engineer that builds a system that controls 1000 machines in some distributed system, that serves content to 100 million people has massive leverage, and is worth paying an extra few hundred grand.
> An engineer that builds a system that controls 1000 machines in some distributed system, that serves content to 100 million people has massive leverage
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.
Right, but the market caps have gone up so much. If you run some basic metric like market cap/number of engineers, places like facebook have an insane incentive to pay huge money for talent. The relative scope may have gone down (many people on one project/api), but the wide ranging impact on PnL/Profitability/Money generated by those individual engineers changes have gone up
> 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
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.
That's very much true, even though I had an exit, if I could turn back the wheels of time, I would have spent a few years in a FAANG job. Way less stressful and you (can) have exposure to startup culture anyway there.
Yep and you also can learn to deliver products at scale.
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.)
I'm an L6 at Amazon and I'm not sure if millions are possible in 4 years, but the replies are right in that you get close to a million. RSUs, investing back into the socket market etc etc gets you there.
Yup, nowadays I see most MVPs and at first glance I am amazed at the quality. Back in the day, a well put together MVP was probably enough to make your product go viral
That depends heavily on the product, but yeah it's true. Also what I see is teams are getting better at focusing on their core value and stripping away unnecessary things at the beginning.
Yeah, looking back to the mid-aughts you could probably "launch" a "product" in a few weeks. You could stretch that 5K into a few months of runway as your expenses are rent, food, internet, and maybe $150/month tops in SaaS stuff.
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.
> Going by my memory, when YC started they invested 5K per founder.
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.
The short article clearly states that YC is now wealthy enough to pay founders more of what they need to survive, and to edge out other investors offering this critical funding.
In my mind, it’s a signal that we’ve solved all the problems capable of being solved by a hungry person with little experience in the problem space. The problem space that’s left is in places that require a significant amount of expertise to be able to even spot an opportunity, and the cost of developing products to address those spaces is much higher since there are ample opportunities to become a millionaire through just working for a big tech company.
The tech product world is just more mature, and more mature leaders and developers are required as a result.
I'm also really curious about their bets and the data. I thought the market was starting to cater to older, more experienced founders?
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?
I think its a common misconception that YC primarily invests in 20-somethings eating ramen and dreaming big. Lots of YC founders have kids and stuff. This was true when I went through in YC in 2011 (interestingly first batch that got $250k from Yuri Milner) and doubly true when I just went through in 2021.
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.
in addition to what you said, there is also more global competition for startups. YC has to compete with other cities top incubators on a CoL adjusted opportunity cost. and the bay area is one of (or the) most expensive spot.
From what I see around me, people with little to no 'real-life' experience rarely make it in startup world.
On the contrary, people with proven track record in an industry have a jolly great time fundraising and building companies.
That's just my experience, also I am a good few years older when I was doing the 'ramen and think big' thing.
The industry has changed. In 2005 the hot growth industry was the web, particular the social and sharing economy parts of it. These favor changes in consumer behavior, which young 20-somethings are particularly tapped into because their peers are often the ones driving the change. You could found a $100B company as a pair of early 20-somethings learning brand new tech and riding the beginning of some social wave.
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.
Not OP, but in one sentence: YC will give you an additional $375k now, in exchange for the promise to give them equity at the same terms you give other investors when you raise your next round of funding.
The criticism here is that you need to give up a higher % of your company down the road.
Why would you need to give up a higher percentage of your company? Can't you just give those later investors a smaller share in exchange for $375k less money?
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.
Out of interest sake, how much importance does YC place on actually having existing users (not necessarily a lot of revenue, but hundreds of users) as opposed to not? It sounds like a non-brainer question but YC is a bit different than other funds.
Not sure you're going to get an answer from someone more knowledgeable at this point, but from my understanding, the answer is "some." Obviously, the more users the better. You have more traction and a bigger base to get feedback and improve your product. However, YC has still publicly stated that they do fund people based on an idea or MVP without any users, but you'll need a stronger founder profile / problem with unique perspective / MVP to compensate.
Pretty interesting move. Great for founders raising seed rounds after YC. Great for YC. Not sure if it's as great for founders who want to raise a little at a pre-seed price (e.g. $1m at $10m post) because now there's $375k extra converting at whatever valuation you raise at.
If you wanted to raise $1m at $10m post, well, you already have the $375k, so you can just raise $625k at 10m post now and your outcome is the same as the prior YC arrangement.
Not exactly, although clearly this is in some part a reaction to the kind of insane amount of VC sloshing around.
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.
Question for YC: if a solo founder fully intends never to take additional funding after YC, is that considered defrauding YC (or at least a bad faith application)? I thought YC only invests in companies which it expects to go "VC-scale big", i.e. multiple series of follow-on funding to hit $100M+ annual revenue targets and huge teams?
I’ve been in this position myself. To be fair, you aren’t bootstrapping if you’re taking YC funds, right?
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.
This is a super valid question that I have seen asked multiple times with no clear answer.
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.
Very curious to see what kind of pricing pressure this puts on seed investors who traditionally invest after YC. The dynamics seem likely to swing even more in favor of founders.
There isn't the same pressure on founders to raise a seed round as they are likely to exit YC with significant capital and runway. Seed investors still have capital allocation targets and are likely to improve their offers to encourage founders to accept investment.
This also incentivizes founders to raise at a higher cap to minimize the dilution from the $375k. I imagine it'll be harder for investors to negotiate a lower cap or get a discount.
I wouldn't call 400-500k a significant runway, but it should have some effect, since you can put of fund raising for at least a few months, maybe even 2 years if you're frugal. At that time you are hopefully further along.
They can wait longer before seeking funding. And since the terms for the 375k are based off the first funding round it makes sense to wait until the last second to minimize the percentage that goes to yc.
Yea I was thinking this too. A reasonable startup is talking to other investors besides YC when they apply, so those investors will have to make up their mind before you get in or they will have to accept the same MFN note after
I posed the exact question here and got the non-answer that an unconverted SAFE is just debt, but it's not just debt.
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?
More than the specific $ figure or % ownership etc (these are all minor details), what I'm interested in is the "general goal" of YC's approach. What the YC approach is aimed at creating and incentivizing founders to do, and how it might be different from other VCs.
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?
I love the comments saying that giving $500k instead of $125k will make things worse. Clearly YC should have made things better instead, by giving less!
Why stop there though? If YC really cared about founders, they'd give them nothing. Better yet, make them pay - now that would have really been helpful! But no. Clearly YC doesn't care about founders and is only trying to exploit them.
YC really ought to stop making things worse for founders like this. I mean how dare they.
I'd be curious to see if YC founders, for whatever reason, are able to choose to opt out of the 375.
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.
Just as a point of technicality, this is not pro rata for YC, right?
> 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.
That's true. I wasn't sure what else to call it. I guess it's more investment upfront at a later valuation. It's almost like a SAFE where the next SAFE acts like a priced round.
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.
Money is only one aspect of the deal. There is wide network of existing companies, investors, etc. Value of these varies according to type of the company.
For some companies existing for a couple years, sure. For others, they just gave a person with an idea a 1.66m company (93% of a suddenly worth 1.785m idea).
I've always been casually curious about applying to YC, but I'm allergic to the terms because they are not in plain English.
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?
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.
Re: "not plain English" - YC is BY FAR the most transparent and founder-friendly VC seed investor and goes to great lengths to educate founders.
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.
Based on your statement of "...not interested in learning about SAFEs...and not owing anyone anything" you are not interested in running a venture investor backed business. You want to bootstrap[1].
Am I the only one who thinks this is a bad deal in 2022? $500K is not much and you’re effectively giving up a big chunk of your equity for reputation and “access”.
My impression has always been that you are paying a premium to have the YC partners, and their network, spend part of their day thinking about how to make your company succeed. That "access" seems pretty valuable? I have no idea how to value it though.
Well first, "I could just bankroll myself and save 7%!" is not how risk management works. Second, the level of privilege in this comment is astounding. $500k is a lot of money if you didn't grow up elite.
That’s not fair and I didn’t mean to come across that way. But a good portion of people who worked 5-7 years in SV (or in other tech hubs such as Boston, NYC, Seattle/PDX) have $$$ in the bank.
$500k is a lot of money but arguably not enough (for most things not strictly SaaS). So either the idea is small enough that it seems you don't need $500k and could probably bootstrap yourself or you're too big for YC and will never happen anyway.
The privilege is assuming that your experience with SWE projects maps to everything worth doing.
I *think* that this is overall a good thing, but does it not implicitly create a floor for what a future funding round would be able to raise at?
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?
I definitely agree with you here. If you aren't doing so hot and you have to raise at a low valuation with an extra $375k to "convert" at that low valuation, then you'll be hit with a ton of dilution.
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.)
> Fortunately, I think this is balanced by the fact that it will give more runway to companies before they have to deal with 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
361 comments
[ 5.3 ms ] story [ 282 ms ] threadS.A.F.E = Simple agreement for future equity
It's like a "preorder for investors"
https://www.ycombinator.com/documents/
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
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?
0: https://www.ycombinator.com/documents/
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.
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.
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.
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).
[0] https://atoms.accel.com/
[1] https://surgeahead.com/
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.
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 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.
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.
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.
What makes you say that?
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?
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?
Why stop there though? If YC really cared about founders, they'd give them nothing. Better yet, make them pay - now that would have really been helpful! But no. Clearly YC doesn't care about founders and is only trying to exploit them.
YC really ought to stop making things worse for founders like this. I mean how dare they.
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.
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
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.
The privilege is assuming that your experience with SWE projects maps to everything worth doing.
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