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> Basically in joining YC, each YC member would be granted a percentage of YC's 7% stake in all of the YC companies which would reduce their need to fundraise.
by nugget 9y ago
> Basically in joining YC, each YC member would be granted a percentage of YC's 7% stake in all of the YC companies which would reduce their need to fundraise.
I was curious what this could mean in reality so I did some back of the envelope math. (As a disclaimer - I have no inside knowledge of the performance of YC's portfolio, so all this math could be wrong.) YC Summer '17 had 294 founders at 124 startups. Let's say there is an Airbnb ($30 billion to common at liquidity) and three smaller but still substantial exits ($1 billion, $500 million and $250 million respectively, same terms). The rest of the class is a wash after expenses and fees which leaves $31,750,000,000 to split up. On a side note, every time I do this math I'm reminded how the ten figure exits really carry the rest of the valley along for the ride; whether there is one in your class or not is a roll of the dice.
YC keeps 4% for themselves (out of which they generally fund expenses and management fees) and puts 3% (with no carry) into the common class pool, divided equally by startup (not founder, to avoid perverse incentives around cramming). In other words, the YC Summer '17 class collectively owns 3% of every member company. After ten years the 3% has been diluted down by follow on rounds to 1.5%. At liquidity, the fund returns 1.5% of $31.175 billion: $467,625,000. Divided among 294 founders equally (which it wouldn't be, as mentioned above - but for easy math) that's about $1.5 million per founder.
If you miss the class with an Airbnb, Uber, or Snapchat and end up with (merely) a few traditional unicorns, the returns decline 90% to a couple hundred thousand dollars per founder, a.k.a. not that exciting financially. So it seems like a gamble.
Still, I like the spirit of the whole idea. As a lifelong entrepreneur who hasn't quite pulled the trigger on applying to YC this might push me over the edge. It would definitely feel like being part of a grander experiment of some kind.
- chrishacken 9y agoMaybe I'm missing something. I don't see how that would reduce anyones need to fundraise. No one can wait around 10 years for others in their class to become liquid to fund their company.
- njarboe 9y agoIf you know you are a likely to get between $100k and $1m in ten years, then there is a lot less financial risk of not putting any money in a 401k for a few years when creating a startup that eventually fails. I think this is a really cool idea. It would also will bind the group together even more (if you think that is a good thing).
- chrishacken 9y agoDoes anyone running a startup actually put money in a 401k? (Serious question.) I do not, nor do I know anyone else who does. I also don't see how that's enough money to tip the scale.
- nwenzel 9y agoI do. So do my cofounder and many of our employees. We made the 401k available around 15 employees (I think). The tax savings of the 401k offsets the cost of providing the 401k, so its basically free-ish to offer... without matching. For reference, we started offering the 401k before our A round. At that point, we had raised $2M and were still under $1M ARR run rate. Based in the Bay Area. I don’t get the narrative that startups pay very little or don’t offer any benefits. We pay competitive comp and offer good benefits to get great people. We’re an enterprise SaaS company, so maybe pre-revenue or consumer or hit-based companies are different. But even our first employee was well compensated. Though at that point, my cofounder and I were paying ourselves well below market and were living off savings.
- jaggederest 9y agoI might be confused, but I thought it was a fund composed of a percentage of all YC companies, not just the current batch. So past batches would be liquid and able to return value to support current batches. This is, of course, largely how firms trading with their own money work, but not historically how VC firms operate.