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Everyone at YC knows exploiting naive founders is more profitable and less risky than doing a startup. The chumps are the founders, not the investors.

by 7e 3y ago

echelon 3y ago
Almost every major tech company took capital. Almost every major company period took capital. Money is energy and time. You can do it without these, but the gradient is steeper.
- robocat 3y ago
  > major Selection bias. The median return for a founder is about $0. If you want to be a billion+ market cap company, sure, use capital to get there. But chances are that the startup will fail. VC investing is diversified - a founder is not.
  - aleph_minus_one 3y ago
    > VC investing is diversified - a founder is not. Founders are free to make agreements to swap equities of their companies with each other. For simplicity assume that there exist three startups with a similar estimated company value. Each founders gives two 10 % equities (and keeps 80 %) of his startup to each of the two founders of the other two startups. This way, the risk of founding a startup becomes a little more diversified.
    - robocat 3y ago
      > Founders are free to make agreements to swap equities of their companies with each other. Only in theory. Firstly it depends on the shareholders agreement, and other contracts with the VC. Co-Sale rights, First Refusal rights, drag-along etcetera etcetera can easily effectively prevent selling common shares. Or clauses just put the idea into the too hard basket. Secondly: nobody wants to give away voting rights. Small investors don't care about voting rights in public companies so they forget just how important voting is in private companies Thirdly: the necessary diversification would need to swap more than 50% of shares to get effective diversification. Good luck with that!! Forthly: the dynamic would be that everyone would want to swap their shares with the perceived best startup in the cohort. It just wouldn't work. The only way it could work would be if founders got some ownership of a VC fund. > little more diversified. Exactly: not diversified enough. VCs often own significant percentages of the companies they invest in. And they own preferential shares. Common shares have a completely different risk profile than preferential shares.
      - aleph_minus_one 3y ago
        > The only way it could work would be if founders got some ownership of a VC fund. Sounds like a decent option. :-)
seizethecheese 3y ago
Exploiting by giving half a million dollars and taking no control? Right.
- robocat 3y ago
  YC tag teams to VCs who definitely game the system. YC sells a good founder friendly story and it seems believable and YC is a repeat player so they care about their reputation: however the financial incentives of YC are not well aligned with founders (for example YC gets preferential shares, and founders get common stock). The best writing on this is: https://siliconhillslawyer.com/2019/02/18/relationships-and-power-startup-ecosystems/ https://siliconhillslawyer.com/2019/02/18/relationships-and-... https://siliconhillslawyer.com/2019/05/01/startups-shouldnt-use-yc-post-money-safe/ https://siliconhillslawyer.com/2019/05/01/startups-shouldnt-... https://siliconhillslawyer.com/2019/03/03/standard-term-sheets-problem-yc/ https://siliconhillslawyer.com/2019/03/03/standard-term-shee... The issues of control only really matter for the few unicorn winner companies. YC can afford to be very founder friendly to loser companies or to founders before the company becomes a clear winner. Founders of winning companies are not going to publicly complain if YC is less than fair.
  - dilyevsky 3y ago
    If vc doesn’t get preferred shares, someone can just turn around and immediately sell the company for $400k and keep 90% of the money so that would seem like a silly thing to complain about
    - robocat 3y ago
      Don't be "silly": that is just the standard bullshit argument. It is a poor argument because it is entirely possible to come up with terms that could be written into the contracts to prevent that obvious scenario. I wouldn't be surprised if tag-along or preferential rights or other clauses don't already prevent that scenario. Anybody know? Founders often invest $100000's of their time - yet they are not given equivalent value in preferential shares. The game is rigged!
TimPC 3y ago
If you have a great team going to YC helps lower your downside. The most successful companies in your cohort are likely to acquihire you when they need to grow quickly.

Everyone at YC knows exploiting naive founders is more profitable and less risky than doing a startup. The chumps are the founders, not the investors.

by 7e 3y ago

Everyone at YC knows exploiting naive founders is more profitable and less risky than doing a startup. The chumps are the founders, not the investors.

echelon 3y ago

Almost every major tech company took capital. Almost every major company period took capital. Money is energy and time. You can do it without these, but the gradient is steeper.

robocat 3y ago
> major Selection bias. The median return for a founder is about $0. If you want to be a billion+ market cap company, sure, use capital to get there. But chances are that the startup will fail. VC investing is diversified - a founder is not.
- aleph_minus_one 3y ago
  > VC investing is diversified - a founder is not. Founders are free to make agreements to swap equities of their companies with each other. For simplicity assume that there exist three startups with a similar estimated company value. Each founders gives two 10 % equities (and keeps 80 %) of his startup to each of the two founders of the other two startups. This way, the risk of founding a startup becomes a little more diversified.
  - robocat 3y ago
    > Founders are free to make agreements to swap equities of their companies with each other. Only in theory. Firstly it depends on the shareholders agreement, and other contracts with the VC. Co-Sale rights, First Refusal rights, drag-along etcetera etcetera can easily effectively prevent selling common shares. Or clauses just put the idea into the too hard basket. Secondly: nobody wants to give away voting rights. Small investors don't care about voting rights in public companies so they forget just how important voting is in private companies Thirdly: the necessary diversification would need to swap more than 50% of shares to get effective diversification. Good luck with that!! Forthly: the dynamic would be that everyone would want to swap their shares with the perceived best startup in the cohort. It just wouldn't work. The only way it could work would be if founders got some ownership of a VC fund. > little more diversified. Exactly: not diversified enough. VCs often own significant percentages of the companies they invest in. And they own preferential shares. Common shares have a completely different risk profile than preferential shares.
    - aleph_minus_one 3y ago
      > The only way it could work would be if founders got some ownership of a VC fund. Sounds like a decent option. :-)

seizethecheese 3y ago

Exploiting by giving half a million dollars and taking no control? Right.

robocat 3y ago
YC tag teams to VCs who definitely game the system. YC sells a good founder friendly story and it seems believable and YC is a repeat player so they care about their reputation: however the financial incentives of YC are not well aligned with founders (for example YC gets preferential shares, and founders get common stock). The best writing on this is: https://siliconhillslawyer.com/2019/02/18/relationships-and-power-startup-ecosystems/ https://siliconhillslawyer.com/2019/02/18/relationships-and-... https://siliconhillslawyer.com/2019/05/01/startups-shouldnt-use-yc-post-money-safe/ https://siliconhillslawyer.com/2019/05/01/startups-shouldnt-... https://siliconhillslawyer.com/2019/03/03/standard-term-sheets-problem-yc/ https://siliconhillslawyer.com/2019/03/03/standard-term-shee... The issues of control only really matter for the few unicorn winner companies. YC can afford to be very founder friendly to loser companies or to founders before the company becomes a clear winner. Founders of winning companies are not going to publicly complain if YC is less than fair.
- dilyevsky 3y ago
  If vc doesn’t get preferred shares, someone can just turn around and immediately sell the company for $400k and keep 90% of the money so that would seem like a silly thing to complain about
  - robocat 3y ago
    Don't be "silly": that is just the standard bullshit argument. It is a poor argument because it is entirely possible to come up with terms that could be written into the contracts to prevent that obvious scenario. I wouldn't be surprised if tag-along or preferential rights or other clauses don't already prevent that scenario. Anybody know? Founders often invest $100000's of their time - yet they are not given equivalent value in preferential shares. The game is rigged!

TimPC 3y ago

If you have a great team going to YC helps lower your downside. The most successful companies in your cohort are likely to acquihire you when they need to grow quickly.