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How does Startups pay salaries when they raise only 125k USD?

17 points by v8dev123 5y ago

For example, YC invests $ 125,000 in a single deal. I'm puzzled now, how does a startup pay a salary with such an amount?

vvilliamperez 5y ago
Salaries aren't paid in lump sum. You expect more funding or revenue by that point. YC investing also creates buzz for other investors so it's easier to get more people on board. "We are a YC backed company, asking for 400k series A"
- SpiderWeb 5y ago
  400k for series A? Most of the startups are raising our 10 million for series A these days.
DigitalSea 5y ago
If you're raising such a little amount, your team isn't going to be that big. Salaries are usually paid monthly, so that amount can technically sustain a small team of developers and a designer for a few months. When a startup raises money, it's a sign of confidence and generally means they won't have an issue raising more money. Seasoned investors will sometimes wait until someone else makes the first move before diving in.
- beforeolives 5y ago
  > Salaries are usually paid monthly, so that amount can technically sustain a small team of developers and a designer for a few months. Obviously everyone has different interests, personal circumstances and risk tolerance but I'm amazed by the people who get involved in companies with little runway. Very early startup employees, what's motivating you?
  - emteycz 5y ago
    The possibility of huge piles of cash
muzani 5y ago
It's not for salaries, more for living costs for the founders. Most founding teams are expected to be able to build a prototype and get some sales on their own. Once they have product-market fit, they raise money to scale, which is where salaries come in. The deals are low for good reason. If they have too much too early, they'll start scaling before they have the right thing to scale.
i_have_an_idea 5y ago
The truth is YC at 125k is a ridiculous deal. They're essentially banking on the brand name being valuable enough for you to give up significant equity for what is, in reality, very little money. This is getting more and more true each day as YC accepts more and more companies, from anywhere, in more and more batches and you get even less access to contacts and mentorship.
- tacostakohashi 5y ago
  I used to be amazed that anyone found it appealing back when it was $20,000! https://blog.ycombinator.com/a-new-standard-deal/ https://blog.ycombinator.com/a-new-standard-deal/ Even if you're eating ramen, that's like 3-6 months of expenses at best. For anyone that isn't like fresh out of college, you'd think they'd have access to that kind of capital through savings, family/friends, or even credit cards. I guess it rather strengthens your point about it being all about the brand name rather than the capital.
  - cosmodisk 5y ago
    Family/Friends/Credit Card isn't something you can walk away in case of failure.
smackeyacky 5y ago
You budget for a tiny team, getting paid minimum wage and hoping that you can stretch it to a further injection of funds. Most startups who get to YC or HAX already have a demonstrable MVP and the 125k should get you to customers, a further investment or some kind of industry or government grant. Occasionally you can talk the incubator into a couple more convertible notes if you need to get over an obvious hump. Getting to YC or similar is a bit of a ticking time bomb and deliberately so. You aren't funding a cool lifestyle, you are building a sustainable businesd that repays the investment.
- slap_shot 5y ago
  > You aren't funding a cool lifestyle, you are building a sustainable businesd that repays the investment. I'd bet that 99% of YC companies do not generate the free cash flow to repay the investment during their three months in YC. YC does not want you want repay the investment. YC wants you to raise a highest valuation you can as quickly as you can.
- pcthrowaway 5y ago
  Paying minimum wage is counterproductive unless you're a founder or have founder-sized equity. You should pay at least a living wage, even to equity-holders, and would still need to find talented people willing to take a pay cut in return for significant equity.
giantg2 5y ago
Is it possible that they have funding from other sources - investors, founders, sales, etc?
slap_shot 5y ago
Most companies have such a low burn that 125k covers the three months to demo day Some companies are already funded prior to doing YC Some companies raise a seed round before demo day
ecesena 5y ago
YC deal is $125k for 3mo, originally meant to make sure you could stay for 3mo in Palo Alto. Then you likely raise $1-2M.
hctaw 5y ago
If you walk away from YC demo day with only the YC money in the bank you've done something horribly wrong. It's the quickest way to high quality seed investment in the world.
Irina_P 5y ago
I think those funds are meant to be spent towards improving your product and acquiring new users. I don't think that grant is meant for the salaries

17 points by v8dev123 5y ago

For example, YC invests $ 125,000 in a single deal. I'm puzzled now, how does a startup pay a salary with such an amount?

vvilliamperez 5y ago

Salaries aren't paid in lump sum. You expect more funding or revenue by that point. YC investing also creates buzz for other investors so it's easier to get more people on board. "We are a YC backed company, asking for 400k series A"

SpiderWeb 5y ago
400k for series A? Most of the startups are raising our 10 million for series A these days.

DigitalSea 5y ago

If you're raising such a little amount, your team isn't going to be that big. Salaries are usually paid monthly, so that amount can technically sustain a small team of developers and a designer for a few months. When a startup raises money, it's a sign of confidence and generally means they won't have an issue raising more money. Seasoned investors will sometimes wait until someone else makes the first move before diving in.

beforeolives 5y ago
> Salaries are usually paid monthly, so that amount can technically sustain a small team of developers and a designer for a few months. Obviously everyone has different interests, personal circumstances and risk tolerance but I'm amazed by the people who get involved in companies with little runway. Very early startup employees, what's motivating you?
- emteycz 5y ago
  The possibility of huge piles of cash

muzani 5y ago

It's not for salaries, more for living costs for the founders. Most founding teams are expected to be able to build a prototype and get some sales on their own. Once they have product-market fit, they raise money to scale, which is where salaries come in. The deals are low for good reason. If they have too much too early, they'll start scaling before they have the right thing to scale.

i_have_an_idea 5y ago

The truth is YC at 125k is a ridiculous deal. They're essentially banking on the brand name being valuable enough for you to give up significant equity for what is, in reality, very little money. This is getting more and more true each day as YC accepts more and more companies, from anywhere, in more and more batches and you get even less access to contacts and mentorship.

tacostakohashi 5y ago
I used to be amazed that anyone found it appealing back when it was $20,000! https://blog.ycombinator.com/a-new-standard-deal/ https://blog.ycombinator.com/a-new-standard-deal/ Even if you're eating ramen, that's like 3-6 months of expenses at best. For anyone that isn't like fresh out of college, you'd think they'd have access to that kind of capital through savings, family/friends, or even credit cards. I guess it rather strengthens your point about it being all about the brand name rather than the capital.
- cosmodisk 5y ago
  Family/Friends/Credit Card isn't something you can walk away in case of failure.

smackeyacky 5y ago

You budget for a tiny team, getting paid minimum wage and hoping that you can stretch it to a further injection of funds. Most startups who get to YC or HAX already have a demonstrable MVP and the 125k should get you to customers, a further investment or some kind of industry or government grant. Occasionally you can talk the incubator into a couple more convertible notes if you need to get over an obvious hump. Getting to YC or similar is a bit of a ticking time bomb and deliberately so. You aren't funding a cool lifestyle, you are building a sustainable businesd that repays the investment.

slap_shot 5y ago
> You aren't funding a cool lifestyle, you are building a sustainable businesd that repays the investment. I'd bet that 99% of YC companies do not generate the free cash flow to repay the investment during their three months in YC. YC does not want you want repay the investment. YC wants you to raise a highest valuation you can as quickly as you can.
pcthrowaway 5y ago
Paying minimum wage is counterproductive unless you're a founder or have founder-sized equity. You should pay at least a living wage, even to equity-holders, and would still need to find talented people willing to take a pay cut in return for significant equity.

giantg2 5y ago

Is it possible that they have funding from other sources - investors, founders, sales, etc?

slap_shot 5y ago

Most companies have such a low burn that 125k covers the three months to demo day Some companies are already funded prior to doing YC Some companies raise a seed round before demo day

ecesena 5y ago

YC deal is $125k for 3mo, originally meant to make sure you could stay for 3mo in Palo Alto. Then you likely raise $1-2M.

hctaw 5y ago

If you walk away from YC demo day with only the YC money in the bank you've done something horribly wrong. It's the quickest way to high quality seed investment in the world.

Irina_P 5y ago

I think those funds are meant to be spent towards improving your product and acquiring new users. I don't think that grant is meant for the salaries