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Great 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 t

Great 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 ago
On 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.
- sethbannon 8y ago
  Generally a huge fan of the way you're simplifying things here, just pointing out that this change makes YC more expensive for founders from an equity standpoint. It's true that founders could compensate for this by raising SAFEs from other investors at a higher valuation, but that is likely to make those raises a little more difficult, so there is some downside.
  - neom 8y ago
    This will almost certainly make it harder for founders to raise money, but we found it wasn't that difficult to explain that time has passed so things need to change a little in the cap as we roll forward.
jasonkwon 8y ago
It's clear you put time and thought into this post, so it deserves an equivalent amount in response. I think you’ve understood some things correctly, but not others, but that’s why we're on HN - to help clarify. (1) The modeling you’ve done for the premoney safes is correct, but it’s incorrect for the postmoney scenario. That’s because Angelcalc hasn’t been updated yet for postmoney safes that track the one we released. Angelcalc includes the Series A option pool increase in both flavors of safes, because what people were doing when flipping standard premoney cap safes to postmoney cap safes is they were just changing the pre to post, and nothing else. We deliberately took out the Series A pool increase for reasons that are all detailed in our post. That means both we and the safe holders share the Series A pool increase with the founders, which is not how it’s working on Angelcalc (but we will update it soon). Also, in your postmoney scenario, the valuation cap for the $2M safe needs to be adjusted to be a $12M postmoney cap safe. So if you update the postmoney scenario using all of your variables based on the postmoney safe we released, the results are different. I did it by hand on excel - here’s a screenshot: https://imgur.com/m4V51SH https://imgur.com/m4V51SH Happy to send you a copy of the excel file. Also, to be perfectly transparent, these examples are somewhat artificial because they assume a 0% option pool issuance in both cases, which is unlikely to be the case. Safe investors will do better than in the screenshot I sent the more options that are issued before the Series A round. They also have the option now to ask for a template side letter to participate pro rata in the Series A round itself. (2) The YC deal should be viewed together with the money founders will raise at demo day, i.e. as one continuous round, and thus the combined % of the company you end up selling. That combined % for YC and demo day safes was often too high in the old deal because founders had a hard time understanding how dilution was unfolding. Safe rounds may not have been priced correctly because of that lack of clarity. With these new changes, the days of raising on safes and not knowing how much you owned are over. The days of planning a Series A fundraise not knowing how much you’ve already been diluted are over. We strongly believe that founders will end up less diluted by the combined % of YC and demo day safes. It’s interesting that you would characterize an uptick in YC ownership as “downside” for the founders. I don’t think founders look at our ownership - they look at theirs. (3) An underlying assumption of your post is that the safes and YC deal are changing, but everything else — valuations, option pools, amounts people raise and dilution transparency (or lack thereof) — will remain the same. The point of us doing this though is that we expect it to change all of those other things. Everything is tied together. As Michael already pointed out, once you can see what’s happening, both investors and founders can take better actions on both fronts. High-res fundraising should also become easier, as Carolynn points out on http://ycombinator.com/documents http://ycombinator.com/documents.

mwseibel 8y ago

On 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.

sethbannon 8y ago
Generally a huge fan of the way you're simplifying things here, just pointing out that this change makes YC more expensive for founders from an equity standpoint. It's true that founders could compensate for this by raising SAFEs from other investors at a higher valuation, but that is likely to make those raises a little more difficult, so there is some downside.
- neom 8y ago
  This will almost certainly make it harder for founders to raise money, but we found it wasn't that difficult to explain that time has passed so things need to change a little in the cap as we roll forward.

jasonkwon 8y ago

It's clear you put time and thought into this post, so it deserves an equivalent amount in response. I think you’ve understood some things correctly, but not others, but that’s why we're on HN - to help clarify. (1) The modeling you’ve done for the premoney safes is correct, but it’s incorrect for the postmoney scenario. That’s because Angelcalc hasn’t been updated yet for postmoney safes that track the one we released. Angelcalc includes the Series A option pool increase in both flavors of safes, because what people were doing when flipping standard premoney cap safes to postmoney cap safes is they were just changing the pre to post, and nothing else. We deliberately took out the Series A pool increase for reasons that are all detailed in our post. That means both we and the safe holders share the Series A pool increase with the founders, which is not how it’s working on Angelcalc (but we will update it soon). Also, in your postmoney scenario, the valuation cap for the $2M safe needs to be adjusted to be a $12M postmoney cap safe. So if you update the postmoney scenario using all of your variables based on the postmoney safe we released, the results are different. I did it by hand on excel - here’s a screenshot: https://imgur.com/m4V51SH https://imgur.com/m4V51SH Happy to send you a copy of the excel file. Also, to be perfectly transparent, these examples are somewhat artificial because they assume a 0% option pool issuance in both cases, which is unlikely to be the case. Safe investors will do better than in the screenshot I sent the more options that are issued before the Series A round. They also have the option now to ask for a template side letter to participate pro rata in the Series A round itself. (2) The YC deal should be viewed together with the money founders will raise at demo day, i.e. as one continuous round, and thus the combined % of the company you end up selling. That combined % for YC and demo day safes was often too high in the old deal because founders had a hard time understanding how dilution was unfolding. Safe rounds may not have been priced correctly because of that lack of clarity. With these new changes, the days of raising on safes and not knowing how much you owned are over. The days of planning a Series A fundraise not knowing how much you’ve already been diluted are over. We strongly believe that founders will end up less diluted by the combined % of YC and demo day safes. It’s interesting that you would characterize an uptick in YC ownership as “downside” for the founders. I don’t think founders look at our ownership - they look at theirs. (3) An underlying assumption of your post is that the safes and YC deal are changing, but everything else — valuations, option pools, amounts people raise and dilution transparency (or lack thereof) — will remain the same. The point of us doing this though is that we expect it to change all of those other things. Everything is tied together. As Michael already pointed out, once you can see what’s happening, both investors and founders can take better actions on both fronts. High-res fundraising should also become easier, as Carolynn points out on http://ycombinator.com/documents http://ycombinator.com/documents.