3 ms·

YC's stake gets smaller if the founder gets more diluted, so YC's interests are aligned with the founders'.

Judgmentality 8y ago
While I completely agree YC is providing valuable advice, I do not find your argument convincing. It reminds me of realtors supposedly being aligned with home owners because they make more for a higher sale price, which is true but it's completely ignoring effort. The homeowner has a much higher incentive to put more effort into selling the home for the right price, whereas the realtor has much more incentive to sell it faster. https://www.youtube.com/watch?v=pbFkw_roJqI https://www.youtube.com/watch?v=pbFkw_roJqI This is not a perfect analogy for investors and founders, but it is an example where supposedly incentives are aligned but in reality they might not be. What's best for the investor is not necessarily what's best for the founder. But again, in this case I do agree that YC is providing useful advice.
- austenallred 8y ago
  I hear what you're saying, and that makes sense, but in this case YC has no incentive to "churn and burn" through companies. In fact, given that they _really_ make their money from multi-billion dollar exits, even a marginal amount of dilution in those companies harms them greatly.
  - deleted 8y ago
    [deleted]
dataisfun 8y ago
If I'm not mistaken, YC gets pro-rata as preferred shareholders, so their dilution is not any different from everyone else in that class.
- rlucas 8y ago
  Pro-rata doesn't mean what you are implying. Pro-rata is in theory the right (but not the obligation) to buy back in, at the new price, to get back to your prior ownership level. In practice however, pro-rata is a firmly stated polite request to the next round lead investor to let you do so. The real determinant of whether you get to use the pro-rata right is whether your next round lead investor is OK with it (and whether you want to try to block that next round).
  - dataisfun 8y ago
    Yes, I know. But if you want to tell YC they don't get their pro rata (or practically speaking, convince the founder to tussle with them over that), have fun. I've seen them not budge even when it makes the founder's life much harder as they struggle to balance the pretty typical ownership requirements of new money.
    - rlucas 8y ago
      Good point, YC is a uniquely powerful market participant these days and has both the power and the breadth of portfolio to negotiate hard.
  - deleted 8y ago
    [deleted]

While I completely agree YC is providing valuable advice, I do not find your argument convincing. It reminds me of realtors supposedly being aligned with home owners because they make more for a higher sale price, which is true but it's completely ignoring effort. The homeowner has a much higher incentive to put more effort into selling the home for the right price, whereas the realtor has much more incentive to sell it faster. https://www.youtube.com/watch?v=pbFkw_roJqI https://www.youtube.com/watch?v=pbFkw_roJqI This is not a perfect analogy for investors and founders, but it is an example where supposedly incentives are aligned but in reality they might not be. What's best for the investor is not necessarily what's best for the founder. But again, in this case I do agree that YC is providing useful advice.

austenallred 8y ago
I hear what you're saying, and that makes sense, but in this case YC has no incentive to "churn and burn" through companies. In fact, given that they _really_ make their money from multi-billion dollar exits, even a marginal amount of dilution in those companies harms them greatly.
- deleted 8y ago
  [deleted]

dataisfun 8y ago

If I'm not mistaken, YC gets pro-rata as preferred shareholders, so their dilution is not any different from everyone else in that class.

rlucas 8y ago
Pro-rata doesn't mean what you are implying. Pro-rata is in theory the right (but not the obligation) to buy back in, at the new price, to get back to your prior ownership level. In practice however, pro-rata is a firmly stated polite request to the next round lead investor to let you do so. The real determinant of whether you get to use the pro-rata right is whether your next round lead investor is OK with it (and whether you want to try to block that next round).
- dataisfun 8y ago
  Yes, I know. But if you want to tell YC they don't get their pro rata (or practically speaking, convince the founder to tussle with them over that), have fun. I've seen them not budge even when it makes the founder's life much harder as they struggle to balance the pretty typical ownership requirements of new money.
  - rlucas 8y ago
    Good point, YC is a uniquely powerful market participant these days and has both the power and the breadth of portfolio to negotiate hard.
- deleted 8y ago
  [deleted]