Report
YC’s $500,000 Standard Deal
We're excited to announce our new standard deal at Y Combinator. When a company is accepted into YC, we now invest a total of $500,000.
blog.ycombinator.com
I'm reposting a comment that I posted on HN to this discussion, since I think it's even more relevant in this community:
This is all well and good, but only if you accept the fundamental premise that taking VC investment is the best way to become an entrepreneur and to do good for the world.
I would strongly challenge this premise. I think for the vast majority of tech entrepreneurs, aiming to build a slowly growing business that doesn't have the aspiration to become a unicorn and 1000x everything is much, much better. I think that many great businesses failed because they were convinced by the VC-marketing-hype-machine to take on venture capital.
If YC's goal truly is to do good for the world, they would think about ways to help entrepreneurs make that happen, not force them into the VC world. I know that there are cases where VC-type capital is extremely valuable, and I'm glad that it exists, but for the vast majority, it's the wrong tool for the job.
"I think that many great businesses failed because they were convinced by the VC-marketing-hype-machine to take on venture capital."
There isn't enough talk about this side of VC. Most entrepreneurs set out to become their own bosses but get dragged in by the hype and end up trading one boss for many. I read about this somewhere but can't recall the name or author but in essence, VC money intentionally or unintentionally inserts riggidity into your busienss.
When the vision of the company is not your own and when decision making isn't solely on your hand, you cannot adapt or in some extreme cases, pivot in time.
Plus I think it also advertises an unhealthy image of entrepreneurs. Instead focusing on the aspects that matter such as problem solving, grit, long-term vision, people start to glorify rapid growth, becoming unicorns and the 7/24 hustleing.
YC giving 500k is really good don't get me wrong but I don't think it's what carry the industry to new heights. Accessible tools, good communities, mentorship, etc. are what matters more than just getting quick cash to grow a company.
Entrepreneurship is a decade long game at least and having support mechanisms in place is way more beneficial for every party involved rather than pushing people to seek VC with more fervor.
If you permit me to nitpick a little bit, I think there's a difference between doing good for the world, doing good for yourself, and doing good for entrepreneurs. YC focuses on the first two, not the last one.
Specifically, if you want to have the widest impact for the world at large, not just entrepreneurs, it really does pay to invest in the potentially fastest growing, biggest, most unicorn-esque companies. Because those are going to be the ones that have an outsized impact, almost by definition. And if you want to do right by yourself financially, that's also the best playbook. The proof of that is simple: PG is a billionaire for a reason.
But it's not what's best for entrepreneurs as a whole, of course. Because as you correctly pointed out, most entrepreneurs (even in tech!) should not be trying to turn their business into a unicorn outlier.
I would certainly challenge the assumption that putting money into venture capital is one of the better ways to have the widest positive impact for the world at large.
With the rest, I agree :-)
> When a company is accepted into the YC batch program, we now invest a total of $500,000. We still invest $125,000 for 7% and now also invest an additional $375,000 on an uncapped safe with an MFN
This is a massive boost to how much they're investing. $500k is enough for the initial founders to work on their company for years and years.
If you've got two founders paying yourselves $50k/year each (and I paid myself less living in expensive SF when I did YC ten years ago), that's basically 5 years of runway! And YC is still only taking 7% upfront. That's mind-blowing to me.
I wonder how many companies will apply, get the money, go through the (extremely beneficial and motivating) YC class with their batchmates, and then pull a Zapier or a Key Values and focus on growth and profitability without raising any more money. 🤔
It's a lot of money, but the relative runway this grants is probably not comparable to what it would have provided 10 years ago. The cost of living has increased and continues to increase at a startlingly rate. The same is true for tech salaries. In some ways, the fund needed to increase to ensure graduates are competitive.
Good point. I think it's about $400k in 2010 dollars, still nothing to sneeze at.
It is a lot of money, but the way this additional safe works is a bit scary. It takes on the terms of the lowest cap safe or convertible note between "when you're accepted" and when you raise a priced round. Obviously the $125k Y Combinator safe is issued after you're accepted, so its cap will be one of the options for the MFN cap. I believe Y Combinator's $125k for 7% is a post-money cap safe, which means the cap should be $1,785,714.
This is a pretty low cap and a startup is unlikely to raise more seed rounds at an even lower cap than that, though it could happen. So once you raise a priced round, Y Combinator's additional $375k converts into, at best, 21% of your company, or an even higher percentage if you raise additional safes or convertible notes at a lower cap. This means that as long as you raise a priced round or hit a liquidity event, Y Combinator will own 28% of your company or more in exchange for $500,000. It's not a terrible deal, but it's a massive chunk of your company.
To me, if you've already given up 28% of your company long before you've raised $1 million, you're setting yourself up to eventually have the founders' share of equity at mid-to-high single digits by the time your company IPOs or is acquired as a unicorn. You're basically setting yourself up to be like the Box co-founders, on the opposite end of the spectrum from a high-equity founder group like that of Square (34% at IPO despite raising $500 million in equity financing).
Somebody tell me if I'm wrong about the terms here.
Okay, I'm being told that Y Combinator's $125k safe for the 7% doesn't have a cap. Sorry for not realizing that, they don't mention the lack of a cap in their "deal" descriptions. If that's the case, then it shouldn't affect the MFN safe. Though it's possible that they've modified the $125k safe to have a cap now.
So they take 7% of your company with the 125k$ and then what happens with the 375k$? I don't really get it :)
That would push even more entrepreneurs to apply.
How competitive is it to get in? Any idea on number of applicants vs accepted?
YC says that they accept top 1% of applicants
This is a big step up though. Kudos to them.