How much do Y Combinator founders earn?

http://80000hours.org/blog/341-how-much-do-y-combinator-founders-earn

by theduffman • 12 years ago

113 43 12 years ago

diego• 12 years ago

"When it invests in its companies, Y Combinator values them at US$1.7 million, of which each founding team owns $1.6 million. This implies that founders must earn substantially more than $100,000 per year"

I have no idea how/why the author makes that leap.

aashaykumar92• 12 years ago

Yeah I saw that as a pretty glaring mistake too. I'm guessing he thinks that because the founding team is valued at $1.7M, they actually get $1.6M to spend but I can't believe that to be true at all. From what I know, YC companies receive $120K to spend.

jiggy2011• 12 years ago

I thought YC used convertible notes?

bri3d• 12 years ago

YC uses this, as of recently:

http://ycombinator.com/safe/

Previously they did use convertible notes, I believe.

theduffman2• 12 years ago

Thanks - I clarified it so that it makes clear that this is talking about equity and not cash.

The idea is that YC must make a large return on their $120k and so your $1.6m will end up being worth a lot more than that too - eventually.

This is rough because it depends what financing device they use.

nutjob123• 12 years ago

My takeaway, the pie chart makes it look like %50 of Y Combinator companies from 05-09 were essentially failures. Either dying or selling for less than $5M. On the upside there were a few home runs which essentially made up most of the fund value. I would like to know how these results compare with those of a traditional VC firm.

JustinRubin• 12 years ago

It would also be interesting to compare to the first five years (or founding to present if younger) of other startup accelerators that exist, like Techstars or DreamIt.

ma2rten• 12 years ago

Unless it is a seed fund, because traditional VCs invest later they will have less misses.

nedwin• 12 years ago

In the latest episode of EconTalk Marc Andreesson frequently mentions that half their investments fail. The half that succeed make up for the ones that fail.

Check it out here, it is awesome: http://www.econtalk.org/archives/2014/05/marc_andreessen.htm...

sillysaurus32• 12 years ago

On average, founders from the first five years of Y Combinator are now worth US$18 million after 5-9 years, giving past average earnings of US$2.5 million per year

The total earnings of all Y Combinator founders is around US$9 billion and so the average founding team is worth US$14 million.

Why is the piece talking about averages, when wealth is distributed as a power curve? Talking about average this-or-that gives you almost no insight about the real state of affairs. Both sentences might be true, but not useful.

The YC homepage does a pretty good job of showing off the incredible value you get by being a YC founder. Trying to quantize that value into dollars might not be a good idea.

EDIT: To expand a little more, YC has to be an incredible value. They must offer so much more value than a traditional employer in order to get most people seriously considering whether to do it. YC's biggest competitor is the cushy office job. "The office job" is undoubtedly responsible for removing the vast majority of potential YC applicants, so YC must continue to be a way better deal. I suspect YC's second biggest competitor is the lover. Falling in love is pretty common, and you tend to lose perspective about the rest of your life in comparison to what you have now.

So, it's really as simple as that: Being a part of YC is valuable because it has to be.

bcx• 12 years ago

I agree, I am not sure there is really that much interesting in this article. I'd love to have the author re-write it looking at the distribution, rather than averaging in returns for the top companies which makes up less than 1% of YC companies.

larrys2• 12 years ago

It would be interesting (but unfortunately not practical or possible) to have two groups.

Members of both groups are accepted to YC but then randomly selected as to who actually goes with YC or not. [1]

Of course just knowing that you have been accepted to YC (or telling others) would no doubt skew any outcome. Just like knowing you were accepted to "a Harvard" and/or telling people you were will skew how you are perceived.

That said there certainly could be a study (sans the halo effect) done of startups, as a group that applied but were rejected by YC vs. those that were accepted.

Sounds like something that mattermark could potentially take on. Or maybe priceonomics in a blog post.

[1] Then, years later, compare outcomes.

paul3• 12 years ago

Exactly. There are other problems with the data as well, but the big problem is that he's talking about averages in an industry defined by outliers.

You should start a startup if you think you have it in you to revolutionize an industry, not because someone's spreadsheet says you will earn an average of $X/year doing it. The median founder should expect to earn a lot of valuable experience, and very few dollars.

BenjaminTodd9• 12 years ago

Definitely true that the median can't expect to earn much. In fact, looking at the data, we can see that about 70% exit with only their salaries (typically under $100k).

Like we say in the summary, since all the value is in the tail, an individual should be thinking in terms of 'what are my chances of creating a new DropBox or AirBnB' i.e. revolutionising an industry.

The problem is, no-one knows who exactly that's going to be.

This post shows that getting into YC provides some useful information. It shows you're now in a reference class of ppl who can be expected to earn millions of dollars per year (although the median is still zero).

Beyond that, there's lots more to consider when judging whether to become a tech entrepreneur e.g. are you exceptionally technically able, gritty, able to accept risk, in possession of a potentially huge idea etc. If you got into YC but it's clear you'll never be Drew Houston, then your expected outcome is probably still pretty low.

RoboTeddy• 12 years ago

If you're attempting to earn money to donate to effective charities, and you're risk neutral, it might make sense to consider average rather than likely outcomes.

BenjaminTodd9• 12 years ago

What are the other problems with the data? We're keen to hear.

pcurve• 12 years ago

Exactly. It would be interesting to know the breakdown based on 20 percentile increment.

BenjaminTodd9• 12 years ago

You can get a good idea of that here, plus the stats in the summary: http://80000hours.org/blog/341-how-much-do-y-combinator-foun...

danielweber• 12 years ago

While the statistic is incomplete, for the reasons you say, it's not entirely without value.

For example, if the average return were below the typical developer salary, I'd call it a sucker's bet and say that no one should participate unless it was for the yucks.

sillysaurus32• 12 years ago

Are you sure being accepted into an average YC startup is worse than being accepted into the average non-YC company?

There are more considerations than just money. Quality of life seems like most important. Experience and connections are probably a close second.

BenjaminTodd9• 12 years ago

There's quite a bit of data on the distribution in the post as well. Quoting from the summary:

Most of the returns have gone to a tiny minority of super-successes. The founders of AirBnB, Dropbox and Stripe are worth about US$7 billion, about 78% of all founders’ equity, although they account for 0.5% of the companies.

Outside of the most successful companies, it was still possible to earn significant returns. 12% of companies from the first five years of Y Combinator are now worth US$40 million or more, and a further 10% have sold for US$5-40 million. The remainder probably earned little more than their (low) salaries.

adbge• 12 years ago

Why is the piece talking about averages, when wealth is distributed as a power curve?

80,000 Hours is explicitly focused on maximizing social good, often by advising people on what career will maximize their "earning to give" potential. That is, earning a lot of money to donate to an effective charity (e.g. high rated charities on GiveWell).

Because of this, their analyses tend to look different than it would if it was optimizing towards a risk-adverse individual maximizing personal utility.

The justification for looking at expected value (averages) is expanded on here: http://80000hours.org/blog/12-salary-or-startup-how-do-goode...

absherwin• 12 years ago

The key assumption with this line of thinking is that a model built on a population who don't base their decisions on 80000hours principles will perform well on those who do.

That seems unlikely to true if a passion for fixing a particular problem is both a significant factor in predicting a startup's success and unlikely to be present in one who makes decisions by modeling the value-maximizing way to live one's life.

maxbrown• 12 years ago

This is interesting, I think you're saying that this advice could be for utilitarian good, ignoring the individual.

From a purely utilitarian perspective, maybe the startup compensation curve is best for philanthropy.

Hypothesis: 1,000 people making $100,000 will give significantly less in aggregate than 1 person with $100,000,000. Therefore, if more people go into a corporate ladder job for the $100k, there will be less total giving.

curun1r• 12 years ago

They're doing two averages that lose useful information. You've pointed out one, which I agree with, but the article also averages salary over the life of the company, which I think is losing more useful information.

I'd be much more interested in an average of what the CEOs make in their first year and second year. The Dropbox, AirBnB and Stripe founders wouldn't impact this average all that much since I doubt they were pulling in 7-8 figure salaries from the beginning. And, if someone is thinking of starting a company, they salaries that they're most interested in are those first two years...they want to know just how little they'll have to survive on.

More than two years into a startup, the values might be interesting, but they're not relevant because outcomes vary so wildly.

sytelus• 12 years ago

In statistics, taking average on any distribution is perfectly valid metric that give you an expected value - even on power curve. For example, let's say you roll a dice and get a million dollar if you get 6 but nothing otherwise. Then your expected return is $1M divided by 6.

I was always interested this number: Sum the personal networth increase of each founder and divide that by number of founder years. That would give expected networth gain per year for being YC founder. Due to outliers, I think it would be significant number and actually makes a case for being YC founder.

One another advantage in calculating this number is that you can compare it with other accelerators (provided you have data for large enough number of founders for each). This would be interesting for rank accelerators from founder perspective (as opposed to investor perspective).

kenrikm• 12 years ago

Lies, damned lies, and statistics.. Talking about averages on data that looks more like a hockey stick chart (even if you exclude the outliers like DropBox and AirBnB) is not going to yield very accurate numbers.

scrafty• 12 years ago

Did you read the whole article? The author acknowledges that point more than once.

tslathrow• 12 years ago

You guys should organize. YC Founders Union. Obviously shortened to YCFU.

yeukhon• 12 years ago

Is it just me or do people feel confused after reading this article?

I thought this article was after people like Paul Graham, investors of Y Combinator.

if you can get into Y Combinator, how much will you earn? We

then

Y Combinator recently increased their standard investment to US$120,000, valuing each company at US$1.7 million, of which each founding team owns $1.6 million10.

I personally would call people who came up with the idea founders. People who invested the startup are investors (or managers of capital ventures).

Furthermore, earning !== net worth or valuation Until you sold the company or until you start making big profit like Google does, the numbers present in the article are just pure numbers.

The citations are bad. You called them references? Things like "~US$1.7 million / ~2.2 cofounders / ~7 years = ~104 million." are not even references; they are in-line page note. You don't put that under references! The one that requires references like "This is from AirBnB, Dropbox and a handful of others." doesn't have proper citation.

The last thing is the font CSS style on the page. Seriously, don't go fancy. I almost go blind trying to understand the article three times.

Seriously, I haven't rant so much lately but I really want to find out how much they earn instead the article provides little useful information, is confusing, not professionally written, and is published with horrible font style.

kkotak• 12 years ago

Yes, I felt the same. In many ways, I'm more interested in how the YC group is organized and how they make money.

orky56• 12 years ago

The way the author is calculating "earnings per year" is by backward-looking from a valuation, which obviously has many holes.

1) Valuation != Liquidity. Even if your company is worth millions and your share is also worth millions, until you have exited you are not going to see much or any of that. Even when you do exit, vesting schedules and taxes make that number much different.

2) Earnings != Salary. If you make a certain amount at exit, that doesn't mean you were being paid an annuity in prior years. As stated in the article, with angel investment 50k salary and with VC 100k. You're still a founder making a salary less than you would in industry, which this article should point out to benchmark things a bit.

It's a tough question to answer and the author is taking a bold step to try and tackle it. However, better methods can and should be used to paint a more realistic picture of what founders earn in the moment rather than being optimistic and backward looking.

BenjaminTodd9• 12 years ago

That's a good point - most of the compensation is in equity, which is non-liquid, which makes it significantly less valuable than salary.

coherentpony• 12 years ago

The pie chart is really misleading. It'd be nice to see number of companies as a function of operating income.

mwetzler• 12 years ago

The piece starts out by very nicely warning us about the THREE HUGE OUTLIERS but then, surprisingly, doesn't take them out of the remaining analysis. (Well, they sort of do in the "founders that didn't win" part).

Would be useful & interesting to see the bulleted stats list in the first paragraph with averages & medians (with and without the 3 big successes).

theduffman2• 12 years ago

Yes, unfortunately the data is most solid on the successes because their valuations are public information whereas the figures are more shakey with the smaller companies, and creating an estimate that subtracts the outliers is pretty flimsy.

Our best guess is that 78% of the earnings are in the top three companies gives a general idea of the kind of adjustment you'd have to make.

How much do Y Combinator founders earn?

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