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New Standard Deal
- hemantv 8y agoYC Safes are great way to raise money for early stage startups. It allow them to focus on business which is most important during early stages. This is right step in simplifying it even further.
- neom 8y agoWe raised on safes, it was harder because some VCs don't like them as they've not really been litigated yet (or something) - but I tend to agree they're a great convertible security. Lets end this pre-money nightmare, cap table hell.
- marssaxman 8y agoWhat is a "safe" exactly?
- apandhi 8y agoEssentially, it's a convertible note without the debt aspect.
- mwseibel 8y agohttp://www.ycombinator.com/documents/ http://www.ycombinator.com/documents/
- ai_ia 8y agoMichael, do you know where can I find stats for the number of founders per company accepted in YC? Edit: I found it here. https://blog.ycombinator.com/common-misconceptions-about-applying-to-yc/ https://blog.ycombinator.com/common-misconceptions-about-app...
- katm 8y agoThe average for the last batch was 2 founders.
- dasmoth 8y agoThis is one of those cases where the word “average” is kind-of unhelpful. Mean? Mode? Median?
- streulpita 8y agoI would guess Median is also 2.
- ai_ia 8y agoI meant in more explicit terms. Number of companies with two founders, with one founder etc.
- neom 8y agoConvertible notes are (usually) more like a loan that you (usually) pay back with equity instead of money. SAFE is less like a loan, so you avoid things like interest on the loan.
- deleted 8y ago[deleted]
- bbrunner 8y agoGreat to see this happen again after the original "The New Deal" in 2014[0]. I'm a big believer in having enough capital to not have to worry about day-to-day costs so you can focus on actually running and growing your business, and this feels like a good sort-of "cost of living" increase. [0] https://blog.ycombinator.com/the-new-deal/ https://blog.ycombinator.com/the-new-deal/
- adw 8y ago> $500k safe at a $10 million post-money valuation cap means the founder has sold 5% of the company. This is a common oversimplification, but it's somewhat dangerous and I would be happier if people were more cautious in what they said here. It simply doesn't mean what you said; it means the founder has sold at least 5% of the company. If you're going to either raise 50m or shut the company and ditch your investors, then it's a wash; but if find yourself in a low-money scrappy situation, which realistically is where most non-YC companies are, it's very significant. Convertibles and other structurally similar securities, in contrast to priced equity rounds, essentially have built-in down-round protection for investors. They have advantages, too, not least the speed in which deals can be done, but if you can do a priced round or a convertible round at similar speed and at similar cost, give serious consideration to taking the priced round.
- neom 8y agoHave you ever seen the legal fees of priced vs convertibles be the same? I certainly haven't.
- Kpourdeilami 8y agoI think convertibles cost around $2k at max while priced rounds will start at $20-30k. The $20-30k is not too much money if you are raising over a million but for a $150k round, it is a little bit too much
- adw 8y agoI had a priced round done (at startup rates, admittedly) by Orrick for a few thousand pounds Sterling – I forget the exact amount, but it was well under £5k – back in '09. They knew it was a loss-leader – lawyers want to build long-term relationships too.
- jasonkwon 8y agoEverything you say is fair. On the point about "at least 5%," this is addressed in footnote #3 to the blog post. It's true that it's a simplification, but that's partly what makes the construct easier to work with. I think the other thing to take into account is that if you're doing a comparison of safes, notes and priced rounds, it's not just a matter of seeing if speed and cost are equal, but what else you might have to give up in terms of rights. Priced rounds can come with downround protection too (often do), as well as board seats and investor vetoes on financings, sales of the company, etc. Convertible notes are debt so the investors will have a technical right to demand their money back after a set time (maturity).
- amirhirsch 8y agoNice to see the offer getting better! I wonder about moral hazard in early stage funding. What if YC were to offer rent and salary for founders for 12 months? This would similarly change the dynamics around founders worrying about money while avoiding some of the temptation to over-spend and generally waste funding before building a product.
- mwseibel 8y agoSeems like the founder should be the one who figures out how to best spend the money no?
- neom 8y agoYeah fair, but I think at minimum VCs should start throwing in a linkedin recruiter subscription because man, that thing is just annoying to pay for. :D
- unstuckdev 8y agoSomeone should do a study to see if the lottery effect--where winning the lottery leaves you worse off because you don't know how to handle that much money--is at work with VC funding.
- amirhirsch 8y agoI would argue that founders generally figure out how to best spend investment during YC. At the beginning of the program there is enormous pressure to move fast and leverage the YC investment to show progress by demo day. This leads to wasteful spending and probably causes the majority of the financial stress you're trying to offset with an additional $30K.
- spraak 8y agoWhat does "safe" mean in this context?
- deleted 8y ago[deleted]
- antimatter15 8y agoSimple Agreement for Future Equity (https://en.wikipedia.org/wiki/Simple_agreement_for_future_equity_(SAFE) https://en.wikipedia.org/wiki/Simple_agreement_for_future_eq...)
- wasd 8y agoHow representative are the terms outlined in the example? 18.25% for 1.6M where the lead paid 1m for 6.25%? I've never raised money before so I don't know.
- jasonkwon 8y agoMichael's other blog post has some numbers: https://blog.ycombinator.com/yc-has-changed/ https://blog.ycombinator.com/yc-has-changed/
- adamzerner 8y ago> But startup costs have undeniably increased over the past few years. We thought a $30K increase was necessary to help companies stay focused on building their product without worrying about fundraising too soon. I didn't realize that this was true. I'm interested in hearing more about what has caused the increase in startup costs.
- snowmaker 8y agoPrimarily cost of living increases for the founders. Things like hosting and other services have gone down.
- adamzerner 8y agoAh, that makes sense. Thanks.
- parhamn 8y agoWell as far as I can tell the $120k was set in 2014. So accounting for inflation alone you're looking at a $7k increase. Extract the more pertinent components of that which matter more to typical SV startups (like cost of employment, rent in expensive metropolitan areas, etc) and you end up with at least 30k.
- stephenhuey 8y agoI'd love to see YC or someone release a definitive recommendation on fair equity distribution among the employees of the company. Maybe there'd be a few variations on it to handle differing scenarios, and even if it's really hard to have a one-size-fits-all I think it'd be similar to their SAFE note which tries to offer a pretty good deal to all involved.
- jasode 8y agoOne of your favorited links is "Holloway Guide Equity Compensation"[1] and it has a section of typical percentages. It also mentions some higher percentages for employees which are not typical. As for "fairness", it's going to ultimately be in the eye of the beholder. You could give employee #12 a 5% stake (which is CEO level at other startups) and yet that employee still feels it's "unfair" even it's explained that he's getting more than anybody else in SV. It's human nature for the employee to think he's worth more, and for the employer to think he's worth less -- and therefore, they negotiate. [1] deep link to the employee ownership percentages: https://www.holloway.com/g/equity-compensation#_there_are_no_hard_and https://www.holloway.com/g/equity-compensation#_there_are_no...
- stephenhuey 8y agoThanks for reminding me! I've thought about this a lot from time to time, and I realize I forgot to mention something else besides just the equity distribution. I've heard plenty of stories of nasty ways companies wrangle hard-earned equity out of employees. I think it'd be great for YC or someone of similar stature to encourage companies to use very standard terms to avoid a lot of the unkind ways employees get screwed. One example would be terribly short windows for exercising options.
- jasonkwon 8y agore: short windows for exercising options: https://triplebyte.com/blog/fixing-the-inequity-of-startup-equity https://triplebyte.com/blog/fixing-the-inequity-of-startup-e... https://blog.samaltman.com/employee-equity https://blog.samaltman.com/employee-equity https://news.ycombinator.com/item?id=11198991 https://news.ycombinator.com/item?id=11198991 https://a16z.com/2016/07/26/options-plan/ https://a16z.com/2016/07/26/options-plan/ https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sense https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sens...
- xmly 8y agoStandard deal does not have a discount?
- snowmaker 8y agoWhat do you mean by a discount?
- xmly 8y agodiscount rate
- daniel_levine 8y agono need for a discount if there's a cap. Discount is nice if you don't want to try and set a cap/price, but if you're OK setting a cap then it effectively grants a discount
- simonebrunozzi 8y agoIncorrect. A cap means that above the cap, no discount matters. Below the cap, however, the discount is applied. Example: raising 1M at 10M cap, 20% discount. Scenario 1: next priced round at number below 10M - the cap doesn't apply, the discount does. Scenario 2: next priced round at number between 10M and 12M - the cap doesn't apply, the discount does. Scenario 3: next priced round at more than 12M - cap applies, discount doesn't. In short, either cap OR discount are applied, whatever is the most beneficial to the investor.
- deleted 8y ago[deleted]
- jasonkwon 8y agoI think Daniel was working off of a different understanding of 'discount.' I think he meant a discount off of the price of the next round (Series A). If the Series A is $30M pre but you set a valuation cap on the safe of $20M post, you are getting a 'discount' on the conversion of the safe in the Series A (because it is lower than $30M pre). You're right though that there's a flavor of safes that contain both a discount and a valuation cap, and the investor gets the benefit of whichever approach results in more shares, and your explanation is good.
- aassddffasdf 8y agoSo $150,000 is enough runway for what: 0.6 man-years? Sounds legit.
- erikpukinskis 8y agoIt’s supposed to be like 4 ramen-years.
- tptacek 8y agoThe idea isn't that you go for years on the YC 150k. For most YC startups, the idea is that the social proof of getting through YC buys you access to the market for syndicated convertible debt rounds, which, while talked about extensively on HN, are not all that easy for first-time founders to access without YC's help. So really, YC is giving you some money to get through demo day, at which point you'll raise real "runway" money from seed funders. There's a cohort of YC founders that only do YC (or, at least, rely on YC's money for a long time before raising further); those companies get to break-even cash flow quickly and often aren't (or aren't yet) on the "shoot the moon" trajectory VCs are looking for. But those companies aren't made or broken by YC's decision to "fund" them.
- deleted 8y ago[deleted]
- Animats 8y agoThat's friends and family size money. Why get a VC at that scale?
- gjm11 8y agoAside from the fact (already mentioned) that YC investment brings other benefits besides the money: not everyone has friends and family who are willing and able to drop $150k on a baby startup.
- JumpCrisscross 8y ago> Why get a VC at that scale? A dollar of VC is generally worth, ceteris paribus, more than a dollar of friends & family money. The coaching, connections, reputation boost when talking to other investors, sales prospects, potential employees, the media, et cetera are meaningful.
- sidlls 8y agoThey may be meaningful but how valuable are they? I'm not sure there have been meaningful or rigorous attempts to answer that question.
- tptacek 8y agoThat seems certainly to be true of YC, but I'm less certain about VC in general. YC aside, the major benefit of VC money is that it can make getting more VC money easier, since it's bundled with social proof.
- snowmaker 8y agoMost YC companies raise much more money than YC's investment in the days following YC's demo day. The YC investment is just the start.
- sethbannon 8y agoGreat that YC is simplifying their deal and making it more standard and easier for founders to understand. Also great that they're switching the standard SAFE to be a post-money SAFE, as this will eliminate a lot of confusion around dilution that resulted from the complicated math of the old standard SAFE. Interestingly, unless I'm understanding this incorrectly, this change might mean a worse deal for founders going through YC. As the post mentions, when calculating the dilution taken from a post-money SAFE, all other money raised on convertible instruments before an equity raise are excluded. Functionally, what this means is that while investors on standard SAFEs are diluted by other SAFE investors before an equity round (as are all common holders), investors on post-money SAFEs are not diluted by other investors on SAFEs before an equity round. So unless I'm misunderstanding this, I believe this means that YC (which was previously a common holder like the founders) will no longer be diluted by the money founders raise on convertible notes or SAFEs before an equity round, whereas before they were diluted by that money. To demonstrate this, I modeled out a scenario where a company goes through YC, raises $2m on a $10m cap pre-money SAFE after demo day, and then raises a $10m Series A equity round at a $30m pre-money valuation. Scenario A shows the old YC deal where YC has 7% common, and Scenario B shows the new YC deal where YC invests on a post-money SAFE Scenario A: http://angelcalc.com/model?mod=802&dispShare=0e55666a4ad822e0e34299df3591d979 http://angelcalc.com/model?mod=802&dispShare=0e55666a4ad822e... Scenario B: http://angelcalc.com/model?mod=803&dispShare=8a50bae297807da9e97722a0b3fd8f27 http://angelcalc.com/model?mod=803&dispShare=8a50bae297807da... Note: click "Model" to see the results. In Scenario A, YC is listed as "YC" and in Scenario B YC is listed as "Post SAFE-0 (2.1mm)". As you can see YC ends up with 1.575% more equity in Scenario B. The simplicity of this change is great but it's important that founders understand the downside as well. Team YC, if I'm misunderstanding this, please let me know.
- mwseibel 8y agoOn one hand pre-money SAFEs diluting pre-money SAFEs is helpful to founders. On the other hand it makes it impossible to calculate dilution. As a result, a large number of companies are raising money without understanding their ownership. Once they get to Series A they get a rude awakening when they end up owning less than 50% of their company. By moving to post-money SAFEs every founder will have a clear understanding of their cap table which will allow them to better plan for future funding rounds. The negative effect that you describe can easily be accounted for by slightly increasing the cap at which you raise the SAFE. Needless to say, we are both trying to accomplish the same goal: founders raising money at financial terms that won't result in over-dilution.
- mpenn 8y agoOverall, simplifying how to understand one's cap table is great. It gets in the way of many founders understanding their business in really pernicious ways. I do believe this will change the dynamic for YC founders dramatically 1 - 3 years out if not ready for a Series A (equity round) but need more capital (seed extension). I know many people who raised $500K - $3mm more on SAFEs. Because they were pre-money, the dilution for stacking SAFEs worked. Now, that will be much harder. The next round of financing will need to be an equity round to convert SAFEs to equity. I don't know if this is good or bad, but it will push people very heavily towards an equity round if they need any more funding.
- mwseibel 8y agoIt would still be very easy to raise a bridge round on SAFEs at a higher cap (or the same cap). Not sure why there would be a push to equity round. Even better, you'll know your dilution after the bridge round which will better allow you to plan for the A.
- mpenn 8y agoMy understanding is that additional post-money SAFEs dilute solely common, whereas additional pre-money SAFEs dilute common and other pre-money SAFEs. So if you want to do a new round, by doing an equity round, you can dilute the post-money SAFEs with common. But if you do a 2nd post-money SAFE round, solely common gets diluted. Since keeping cap flat is logistically / emotionally easiest for both sides to swallow, the founder dilution is worse under a "flat" scenario. In the pre-money world, if you did pre-money $10mm cap and raised $2mm, then later another $2mm at same cap, common would own ~71% (10 / 14) on conversion (assuming A is high enough). In post-money world, if you do $12mm cap and raise $2mm (so equivalent to old world in 1st round), then later raise another $2mm with same cap, common would own 67% (8 / 12). That's just 4 - 5%, but a real difference. So I believe the incentive is higher to do an equity round to convert the post-money SAFEs so they can be a part of the dilution of the new round. Unless I am mistunderstanding how they'd convert or something else here. The math is complicated (which I guess is the whole point of why moving to post-money will improve founders' understanding).
- 8y ago
- andrewstuart 8y agoWhat are the practical implications of "post-money cap safe"? Could someone please explain this in laymans terms?
- jasonkwon 8y agoBoth you and your investors will have much better visibility into what % of the company you are selling and they are buying when you are fundraising. It really is as simple as that.
- atrilumen 8y agoLet me stay in Medellin, and you're on.
- pedalpete 8y agoI fail to understand how the YC deal operates as a SAFE with 7% equity? If the SAFE is a non-priced round, then the amount of equity the investor gets is decided when the conversion happens, so it is an unknown, which is why a cap exists. Is YC taking 7% + the conversion?