Is Y Combinator worth it by numbers?

https://michaelbabich.medium.com/is-y-combinator-worth-it-by-numbers-f5d1befc4b58

by Mikho • 3 years ago

3 8 3 years ago

michaelbabich.medium.com

Mikho5• 3 years ago

I crunched some numbers to model different scenarios and different start-up valuations to compare whether the YC deal is any good and what the other options are. In general, thinking about the 7% of the Safe and whether it's worth it is the wrong mental model to start with. It’s like announcing winners and losers in a race immediately after the start and before anybody even runs half a distance. The thing is 7% Safe is just Step 1 in a priced round when YC’s shares convert — and there are 3 steps that depend on the priced round valuation and share a new VC gets. Anyway, I modeled 3 scenarios with 7 different start-up valuations of the priced round for each to compare founders' shares as a result.

robocat3• 3 years ago

YC also has a 4% participation right https://www.ycombinator.com/deal/

Include that and founder ownership drops by 4 percentage points in scenario A.

Also AFAIK the option pool is usually 10% post-money, so the founder would get a few percent less than calculated in the examples (10% pre-money).

Mikho5• 3 years ago

The 4% participation right in the priced round—if YC decides to exercise it—doesn't change anything since it will be a normal equity investment along with a new investor. It means that this new investor gets 96% share of the round and YC gets the remaining 4% of the round. This doesn't influence the founders' ownership in any way—the main number the scenarios compare. In other words, if the priced round results in a 10% share of a start-up given to new investors and YC exercises the 4% participation right, YC gets additional 0,4% and new investor gets 9,6% of this start-up. It doesn't matter for the founders' share what the split of the 10% be.

I'll update the option pool numbers. Thanks.

robocat3• 3 years ago

Ahhhh, right, thank you for the correction.

Note there is a good article on the previous two types of YC SAFE which makes some other points: https://siliconhillslawyer.com/2019/05/01/startups-shouldnt-... Does the YC 7% SAFE get more than $125k liquidation preference when converted?

Also, does it help to add in the legal fees which are usually paid by the company e.g. $30000 is 1% of your example cash, and I don’t think YC charges for legal?

YC definitely sell a good story that being founder friendly is their long-term strategy; however: https://siliconhillslawyer.com/2019/02/18/relationships-and-...

Disclaimer: I am a newbie investor and still trying to understand some of the nuances.

Mikho5• 3 years ago

For those who want to crunch numbers here is the Excel file I created for the comparison with all the scenarios and valuations:

https://link.babich.me/ycdeal

Is Y Combinator worth it by numbers?

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