15 ms·

This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS). I wonder how this will impact the decision to raise

This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS). I wonder how this will impact the decision to raise money after YC. 0 - Including paying the founders a reasonable salary

the-dude 5y ago
Are you sure this is how it would work? From the post I read the remaing 375k will be invested at the next equity round.
- _xnmw 5y ago
  The full $500k is upfront. Quote: > Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
- uranium 5y ago
  The terms are set at the next equity round. The money comes in right away. See the footnote: "Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors."
- aripickar 5y ago
  Not quite. The way that it works is that the 375k is invested now, but at terms that are determined in the next equity round. If the next round values the company at 10 million, then the 375k would be 3.75% of the company.
  - ketzo 5y ago
    Woah, okay, didn't totally understand that until you put some numbers on it. That's... almost unbelievably founder-favored, yeah? Neat.
    - mritchie712 5y ago
      Not unbelievably, just happens to be a win-win. The founder likely wants the capital now and YC wants more ownership.
      - trenchgun 5y ago
        Yes. The company gets the money now. The more they grow, the less YC gets for the 375k. But the more they grow, the higher the value of 7% is going to be. And also, the more they grow, the more they are likely to grow in the future. So the 375k share is also more likely to keep growing. So in a nutshell: the 375k is incentive for the company to grow, which is also in the interests of YC, since they have 7% (+ x%) and in general getting startups to grow is the whole point of YC.
        deleted 5y ago
        [deleted]
      - simonebrunozzi 5y ago
        win (founder) - win (YC) - lose (VC), to be correct.
  - nirmel 5y ago
    This is also not true. Their uncapped MFN note assumes the terms of the lowest-capped safe (or other investment) after their investment. So if founder accepts $3.75m capped safe soon after YC’s investment, then later raises an equity round at $10m valuation, YC gets 10% more, not 3.75% more at that time. There may be dilution from the equity round but that’s a different matter.
    - solarmist 5y ago
      What's not true? It seems correct to me. You're just providing an alternate scenario that isn't as favorable. And since the initial $125k implicitly has a $2m valuation attached to it, if you raise again at $3.75m, then that's probably not ideal. So a sensible approach would be to view this as providing an implicit minimum value to target for your next round, i.e., >$5m (7.5%).
    - robocat 5y ago
      You are incorrect. As per https://www.ycombinator.com/deal https://www.ycombinator.com/deal “The $125k safe and the MFN safe will each convert into preferred shares when your company raises money by selling preferred shares in a priced equity round, which we refer to below as the “Safe Conversion Financing” (this will typically be your “Series A” or “Series Seed” financing, whichever happens first).” Edit: Sorry, I am absolutely wrong here. I completely misunderstood what nirmel was saying.
      - tyre 5y ago
        They are correct. The MFN safe converts at the best terms. So if there is a SAFE with a post-money $3.75m cap, then even if the next round is priced at $100m, YC gets 10% at that 100m valuation. It converts at an equivalent ownership compared to the cap. That's why caps exist.
      - beambot 5y ago
        The MFN applies to other SAFEs too. YC will get the "best" price during the priced conversion. If you took other money at a lower SAFE, that would peg the "best" price in the conversion -- and thus, that's what YC's $375k would get.
maximp 5y ago
I'm also confused about how this works. If you choose to never raise after YC, is the remaining $375K just part of of the 7% they take upfront, or is it only available if you raise? > Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
- mritchie712 5y ago
  You get the 375k now, it is not part of the 7%. The incremental % they own wouldn't be determined until you raise again. But you could choose to never raise again. They'd still own some incremental amount of your company, but % would be a bit unclear unless you got a formal valuation outside of raising or sold the company.
  - SmellTheGlove 5y ago
    If you can build something with 500k and grow at VC-expected multiples without raising again, I'm sure that'd be a pretty positive conversation to go have with YC to determine the equity attached to that additional 375k! I think the issue is going to be that YC isn't looking to fund lifestyle businesses, so getting that initial shot is going to be tough. It just doesn't seem to me like YC is looking for companies that wouldn't have that next equity round. I've never gone through YC though, so don't necessarily take my word for it!
  - tptacek 5y ago
    They would own the 7%, and have a debt claim in the amount of the SAFE on the company at liquidation.
    - gustaf 5y ago
      This isn't correct. SAFE isn't a debt instrument - its a right to own shares in a future round. You are probably thinking of convertible debt.
      - granzymes 5y ago
_xnmw 5y ago
If you never intend to raise again after YC, I'm pretty sure that would be defrauding them. YC expects that you build VC-scale companies which require several rounds of additional funding, anything else is a failure, if I understand correctly.
- andruby 5y ago
  It might go against the expectations, but it would not be defrauding.
  - _xnmw 5y ago
    Explicitly misrepresenting your intentions would be fraud though. I'm not talking about a company that intended to go big, but didn't quite take off. I'm talking about a founder who never intended to go big (keep a small bootstrapped company all the way), but applied to YC claiming big ambitions anyway, just to get the initial $500k check.
    - spoonjim 5y ago
      Fraud is a crime defined in law and this would not meet the bar.
      - lazide 5y ago
        That depends a whole lot on a lot of details not presented, I believe. For instance - did the founder have an explicit plan to do this in advance? Did they materially misrepresent their intentions to the investor while having this plan, with the intent to receive funds they otherwise would not? Was the investor concretely harmed by this misrepresentation? For instance if the investor still profited, it would be very difficult to argue fraud - not impossible of course. If the founder was thinking of this plan, but never wrote it down or said it to anyone, good luck proving fraud. If the founder had never been explicit to the investor, or was never asked by the investor what their plan was, so never materially misrepresented anything (even if the investor was clearly assuming), that would also be hard to argue fraud. Especially so if the investor had a decent amount of wealth or experience. This is why transparency - and due diligence - are so important for all parties. And why it’s important to not put all your eggs (or even most of them) in one basket. For everyone.
itsoktocry 5y ago
>This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS). More money is better than less money, sure. But a couple founders and a couple engineers making reasonable salaries and 500k gets you, what, 1 year? 1.5? Profitability might still be challenging.
- ryanSrich 5y ago
  Yeah no one talks about the cost of engineering. Most quality engineers are looking for $150-$200k salary to start. So a team of 5 is easily $1m after benefits, not to mention any equity grants. And that’s before the founders take a salary, before they hire any designers, or marketing, or sales people. The cost of starting a tech company is still low relative to other fields, but it’s increasing drastically.
  - ramraj07 5y ago
    As OP mentioned, this works for years if a team of founders agree to take minimum wage salaries for a few years. If you need to recruit you’re OOL.
    - ryanSrich 5y ago
      Yeah I agree to an extent. Founders need to get the business to an MVP and some revenue for B2B SaaS. But if you’re growing at any attractive rate, you’ll outgrow that very quickly. It’s that next step that becomes more difficult when hiring engineers. That’s typically your seed round. For example, let’s say you raise $3m. That’s a nice amount until you realize you need 3-5 engineers that are all an average of $200k/yr fully loaded.
  - ddingus 5y ago
    Seems nobody is really investing in that scenario. With modest, to low investment, there should also be very modest returns. By that, I mean taking less to extend runway, but then also have it all pay very nicely on take off.
- mritchie712 5y ago

the-dude 5y ago

Are you sure this is how it would work? From the post I read the remaing 375k will be invested at the next equity round.

_xnmw 5y ago
The full $500k is upfront. Quote: > Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.
uranium 5y ago
The terms are set at the next equity round. The money comes in right away. See the footnote: "Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors."
aripickar 5y ago
Not quite. The way that it works is that the 375k is invested now, but at terms that are determined in the next equity round. If the next round values the company at 10 million, then the 375k would be 3.75% of the company.
- ketzo 5y ago
  Woah, okay, didn't totally understand that until you put some numbers on it. That's... almost unbelievably founder-favored, yeah? Neat.
  - mritchie712 5y ago
    Not unbelievably, just happens to be a win-win. The founder likely wants the capital now and YC wants more ownership.
    - trenchgun 5y ago
      Yes. The company gets the money now. The more they grow, the less YC gets for the 375k. But the more they grow, the higher the value of 7% is going to be. And also, the more they grow, the more they are likely to grow in the future. So the 375k share is also more likely to keep growing. So in a nutshell: the 375k is incentive for the company to grow, which is also in the interests of YC, since they have 7% (+ x%) and in general getting startups to grow is the whole point of YC.
      - deleted 5y ago
        [deleted]
    - simonebrunozzi 5y ago
      win (founder) - win (YC) - lose (VC), to be correct.
- nirmel 5y ago
  This is also not true. Their uncapped MFN note assumes the terms of the lowest-capped safe (or other investment) after their investment. So if founder accepts $3.75m capped safe soon after YC’s investment, then later raises an equity round at $10m valuation, YC gets 10% more, not 3.75% more at that time. There may be dilution from the equity round but that’s a different matter.
  - solarmist 5y ago
    What's not true? It seems correct to me. You're just providing an alternate scenario that isn't as favorable. And since the initial $125k implicitly has a $2m valuation attached to it, if you raise again at $3.75m, then that's probably not ideal. So a sensible approach would be to view this as providing an implicit minimum value to target for your next round, i.e., >$5m (7.5%).
  - robocat 5y ago
    You are incorrect. As per https://www.ycombinator.com/deal https://www.ycombinator.com/deal “The $125k safe and the MFN safe will each convert into preferred shares when your company raises money by selling preferred shares in a priced equity round, which we refer to below as the “Safe Conversion Financing” (this will typically be your “Series A” or “Series Seed” financing, whichever happens first).” Edit: Sorry, I am absolutely wrong here. I completely misunderstood what nirmel was saying.
    - tyre 5y ago
      They are correct. The MFN safe converts at the best terms. So if there is a SAFE with a post-money $3.75m cap, then even if the next round is priced at $100m, YC gets 10% at that 100m valuation. It converts at an equivalent ownership compared to the cap. That's why caps exist.
    - beambot 5y ago
      The MFN applies to other SAFEs too. YC will get the "best" price during the priced conversion. If you took other money at a lower SAFE, that would peg the "best" price in the conversion -- and thus, that's what YC's $375k would get.

maximp 5y ago

I'm also confused about how this works. If you choose to never raise after YC, is the remaining $375K just part of of the 7% they take upfront, or is it only available if you raise? > Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors.

mritchie712 5y ago
You get the 375k now, it is not part of the 7%. The incremental % they own wouldn't be determined until you raise again. But you could choose to never raise again. They'd still own some incremental amount of your company, but % would be a bit unclear unless you got a formal valuation outside of raising or sold the company.
- SmellTheGlove 5y ago
  If you can build something with 500k and grow at VC-expected multiples without raising again, I'm sure that'd be a pretty positive conversation to go have with YC to determine the equity attached to that additional 375k! I think the issue is going to be that YC isn't looking to fund lifestyle businesses, so getting that initial shot is going to be tough. It just doesn't seem to me like YC is looking for companies that wouldn't have that next equity round. I've never gone through YC though, so don't necessarily take my word for it!
- tptacek 5y ago
  They would own the 7%, and have a debt claim in the amount of the SAFE on the company at liquidation.
  - gustaf 5y ago
    This isn't correct. SAFE isn't a debt instrument - its a right to own shares in a future round. You are probably thinking of convertible debt.
    - granzymes 5y ago

_xnmw 5y ago

If you never intend to raise again after YC, I'm pretty sure that would be defrauding them. YC expects that you build VC-scale companies which require several rounds of additional funding, anything else is a failure, if I understand correctly.

andruby 5y ago
It might go against the expectations, but it would not be defrauding.
- _xnmw 5y ago
  Explicitly misrepresenting your intentions would be fraud though. I'm not talking about a company that intended to go big, but didn't quite take off. I'm talking about a founder who never intended to go big (keep a small bootstrapped company all the way), but applied to YC claiming big ambitions anyway, just to get the initial $500k check.
  - spoonjim 5y ago
    Fraud is a crime defined in law and this would not meet the bar.
    - lazide 5y ago
      That depends a whole lot on a lot of details not presented, I believe. For instance - did the founder have an explicit plan to do this in advance? Did they materially misrepresent their intentions to the investor while having this plan, with the intent to receive funds they otherwise would not? Was the investor concretely harmed by this misrepresentation? For instance if the investor still profited, it would be very difficult to argue fraud - not impossible of course. If the founder was thinking of this plan, but never wrote it down or said it to anyone, good luck proving fraud. If the founder had never been explicit to the investor, or was never asked by the investor what their plan was, so never materially misrepresented anything (even if the investor was clearly assuming), that would also be hard to argue fraud. Especially so if the investor had a decent amount of wealth or experience. This is why transparency - and due diligence - are so important for all parties. And why it’s important to not put all your eggs (or even most of them) in one basket. For everyone.

itsoktocry 5y ago

>This makes it much easier to get to profitability[0] and never raise again after YC (especially as a SaaS). More money is better than less money, sure. But a couple founders and a couple engineers making reasonable salaries and 500k gets you, what, 1 year? 1.5? Profitability might still be challenging.

ryanSrich 5y ago
Yeah no one talks about the cost of engineering. Most quality engineers are looking for $150-$200k salary to start. So a team of 5 is easily $1m after benefits, not to mention any equity grants. And that’s before the founders take a salary, before they hire any designers, or marketing, or sales people. The cost of starting a tech company is still low relative to other fields, but it’s increasing drastically.
- ramraj07 5y ago
  As OP mentioned, this works for years if a team of founders agree to take minimum wage salaries for a few years. If you need to recruit you’re OOL.
  - ryanSrich 5y ago
    Yeah I agree to an extent. Founders need to get the business to an MVP and some revenue for B2B SaaS. But if you’re growing at any attractive rate, you’ll outgrow that very quickly. It’s that next step that becomes more difficult when hiring engineers. That’s typically your seed round. For example, let’s say you raise $3m. That’s a nice amount until you realize you need 3-5 engineers that are all an average of $200k/yr fully loaded.
- ddingus 5y ago
  Seems nobody is really investing in that scenario. With modest, to low investment, there should also be very modest returns. By that, I mean taking less to extend runway, but then also have it all pay very nicely on take off.
mritchie712 5y ago