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YC Terms are Poor

70 points by rokhayakebe 18y ago

lbrandy 18y ago
The article operates under the assumption that all dollars are equal. The effect of being invested in by YC versus, say, my grandmother, are not the same. There are alot of other intangibles in play that are almost impossible to quantify. But that doesn't mean they can be safely ignored. It reminds me of the assumption of statistical independence in various machine learning problems where the variables are most certainly not independent... its just that including it makes the problem completely intractable, so even though everyone knows its wrong, they have no choice but to assume it.
- jgrahamc 18y ago
  "The effect of being invested in by YC versus, say, my grandmother, are not the same." That's a strawman argument. The OP isn't comparing YC to grandma, he's comparing it to an angel investment.
  - lbrandy 18y ago
    Ugh. The strawman canard. I didn't -say- that was his argument, therefore its not a strawman . I was simply providing an example to illustrate (with hyperbole) the comment I made in the previous sentence. The one you snipped out. You've essentially repeated my point, elsewhere in this thread, by claiming that the value added comes down the "network" of said angels not just the personal networks but all of the non-financial considerations. Does being a YC versus an average angel-funded company get you more press? How many TC writeups, on average, do you think being YC funded gets you? How much money is that worth? How much page rank is that worth? This is important because he specifically talks about "marketing" as an important early expense, and yet YC provides quite a bit of it, for free.
- aditya 18y ago
  Are you making the smart money vs dumb money argument? Mark does address that: YC argues their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connections. Anyway, I think the real value YC brings is they give you an excuse to focus on your startup full-time like mad maniacs for 3 months. Try doing that outside of YC and people will just ridicule you. Being in YC also provides motivation during those post-idea-pre-prototype stages which are super hard.
- indiejade 18y ago
  He makes some great points. The ideal situation for entrepreneurs is to have VCs competing for equity in their companies: the more VCs out there, the better. OTOH, the ideal situation for VCs is to have tons of entrepreneurs competing for their dollars (hello TechCrunch 50). So while there will probably always be more entrepreneurs than VCs, dollars are almost certainly the most non-unique aspect in the value equation. I guess it's when they get into the big numbers where the little percents equal a lot that a more in-depth analysis is called for.
- cageface 18y ago
  Not really. He recognizes that YC might be worth some premium over another investor. He just questions the size of the premium.
Alex3917 18y ago
What the author misses is that it doesn't really matter what your seed valuation is because the equity of the seed investors gets super diluted by future rounds anyway. Once you've raised a series C the difference in equity for the founders is probably .2%.
- jgrahamc 18y ago
  Depends when you believe you are exit is going to be. If it's that you are going to get Series A and then get bought by BigCo for $x million then the initial terms make a big difference.
- ph0rque 18y ago
  Unless you're a company like Wufoo who don't get any funding beyond angel* because they reach profitability with that funding. * As far as I know
- aditya 18y ago
  Unless you exit before your Series A, which seems to be fairly common for YC companies: Reddit, Clickpass, Auctomatic come to mind... 6% at that early a stage might still be pretty high.
  - nostrademons 18y ago
    If you exit before your Series A, you're probably pretty happy anyway. I dunno about you, but for me I don't care if I get $5M or $4.7M, I'd just be freaking glad to have a few million.
- mattmaroon 18y ago
  Well, it's not about absolute percentages but relative. If YC owns, at the start, 6% and the founders 94%, there will still be that roughly 15-1 ratio on cashout. It might be 15% and 1%, rather than 94-6, but it's still the same % less that the founders get.
GavinB 18y ago
The YC companies aren't being offered the 2M angel valuation, so it seems silly to compare them directly like this. There's nothing barring YC companies from taking more investment after the 3 months in which they go from an idea to a launched product. In fact, being in YC makes a company much more attractive to future investors. I'd say that the difference between an idea on paper and a complete product or prototype is probably 10x, so in that sense these numbers really seem reasonable.
- jgrahamc 18y ago
  "n fact, being in YC makes a company much more attractive to future investors." If this were Wikipedia I'd say [citation needed]. Also, are you comparing being in YC and having no support, or being in YC and having an angel investor? The latter is what the OP is talking about and argues that an angel gives more cash, for less equity.
  - GavinB 18y ago
    The article asks “Is it worth 3 months working by yourself to get 10x a better deal?” It’s asking you to make a false choice. Which e-mail is a VC or Angel more likely to reply to: a) We worked three months on our own and built a prototype b) We were funded by YC for three months and built a prototype
sscheper 18y ago
Here were my thoughts: "my real suggestion is that Y Combinator should invest more" He's missing the whole point right here. Y-Combinator is like Twitter. Venture capitalists are like bloggers. With Y-Combinator, like twitter, people just didn't understand how so much value could come out of so little. At first, typing to someone in 140 characters is hopeless. Then you try it, and you realize how much can come out of so little--you become resourceful and cut out the fat you don't need. Hate to liken them to twitter, but hey, everyone's doing it... (best reasoning ever)
- jgrahamc 18y ago
  No, his argument is that as an entrepreneur you could get more cash for less equity by going to an angel. If you don't dispute that fact then the argument comes down to how much you value the YC network vs. an angel's network.
  - pg 18y ago
    then the argument comes down to how much you value the YC network vs. an angel's network Not so. YC's "network" is not the important thing.
    - jgrahamc 18y ago
      But that's his argument isn't it?
      - pg 18y ago
        No; he gets that it's a matter of both "advice and connections," though he doesn't seem to realize how much more the former varies than the latter.
        zackattack 18y ago
        So YC's principal value is the advice?
TomOfTTB 18y ago
SYC argues their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connectionss I strongly disagree with this statement. As someone who was in the Valley at age 19 I can attest to how backwards many companies are run and how valuable it is to have an experienced entrepreneur guiding you. Of the companies I was around the major difference between success and failure was how much effort the Angel investors put in to mentoring their founders. As far as connections, I mean no offense to the author of this article but it's foolish to assume people will acquire connections as valuable as those Paul Graham has simply by showing up. The more I live in the world the more I realize it's all about connections and the doors that are opened through YC are easily worth an extra 4% In the end you can argue hypothetical numbers all you want but the reality is you have to make a company successful before it's worth anything. Good advice and industry connections are vital to making that happen.
- lbrandy 18y ago
  > As far as connections, I mean no offense to the author of this article but it's foolish to assume people will acquire connections as valuable as those Paul Graham has simply by showing up. You should go one step further because you don't even need to show up to get these connections with YC. YC is basically offering people the ability to email in their idea, and get funding, connections, and a network. I don't live in Silicon valley. I don't know any angels, personally. There are probably a very very very tiny few where I live, but not like the valley. I'd like to know about all these angels I can just effectively email with my idea to get money. That's what YC is offering. I reject the notion that there's all these angels out there offering a similar path and that they are easy to find.
colinplamondon 18y ago
It's amazing how effective "YC terms don't optimize your pre-seed valuation" linkbait is- this has to be the sixth article expounding on the same points.
zaidf 18y ago
Straw man. YC is MORE about the advice from pg, the alum network you are connected to and the long-term value of the connections you continue to make. That is the CORE value of YC--not the $ amount invested. If he thinks YC is poor, he should have based his arguments on how you can get better advice/connections etc. from raising angel than through YC. Instead he decides to take YC on the $ invested/valuation and merely glosses over the advise/non-$ value of YC. This is little more than a straw man.
- davidw 18y ago
  To be fair, unlike many of these articles, he does address this, even if you may not agree with what he says about YC's advice versus going it alone.
  - zaidf 18y ago
    He spends ~1 out of the 12 paragraphs addressing the REAL argument. The other 11 are spent on addressing the straw man argument(that YC is good because of its valuation).
deleted 18y ago
[deleted]
pg 18y ago
"Advice ... [is] easy to find" This is the mistake. Advice is easy to find, but it varies in value. This guy can correctly value our money. It's worth the same as everyone else's. But he has no idea whether our advice is good or bad, and if good, how much better it is than "average" advice, whatever that is.
- trickjarrett 18y ago
  I think another fallacy in his argument is that he is saying all Angel investors are worth the same outside of money. Sure, some angels will bring good advice, input and ideas to the table, but some will not. With YC you know there's a solid support infrastructure.
- scott_s 18y ago
  Not only does advice vary in value, but when you're new to an area, you probably lack the ability to evaluate advice on its own merits.
- vaksel 18y ago
  To be fair, noone knows if your advice is good or bad(essays notwithstanding). Can you give an example of some specific advice you gave to one of the YC startups recently?
  - harpastum 18y ago
    I think the point of the essays and this community is to give startups an idea of the sort of advice they'll be getting [1]. Any "specific" advice would either be too close to the issues to have any meaning outside the company. As far as I can tell, PG has no qualms about "trade secrets"--if he thinks the advice would benefit everyone starting up a company, he will probably write an essay about it. If those ideas and themes resonate with you, you have an idea of what benefits you'll reap from the support of the YC staff. [1] Work hard to create wealth. ( http://www.paulgraham.com/start.html http://www.paulgraham.com/start.html )
  - pg 18y ago
    Actually around 300 people know, because that is about the number of founders we've funded. So if people (e.g. those applying for funding) want to know if YC is worth it, we usually suggest they contact some and ask them individually. I could never talk about conversations I'd had with specific startups, because the more useful the advice was, the more precisely you'd be able to identify the startup.
Xichekolas 18y ago
I'm no expert on this stuff, but it seems like 10x improvement in terms for the Angel route is abusing some New Math. If a two person team goes with YC, and YC gets 6%, then the founders have 94% of the equity and $15k. If they go with the hypothetical Angel, who takes 2.4%, then they end up with 97.6% of the company and $50k. So yes, they end up with 3.3x the cash in hand, but only 3.8% more equity (97.6/94). And it doesn't seem to make sense to multiply those numbers to reach some good-for-headlines number like 10x. Not to mention the stated goal of YC has been "seed stage", which is presumably before, and not exclusive of, "angel stage".
- nolanbrown23 18y ago
  Doesn't YC require an option pool for employees, something along the lines of 15%? If so then the founders only own 79% of the company.
  - wheels 18y ago
    Well, options are granted at the discretion of the board and YC doesn't take a board seat. Most companies will incorporate leaving some percentage of their stock unallocated. Founders only "lose" that percentage of their voting rights when they grant options to later people joining the company, which they'd probably do anyway.
briansmith 18y ago
The author of this article made a mistake in proposing the "more money cheaper" investors as an alternative to YC. In reality, YC and those investors target totally different segments of the market. If you have a good idea, you are confident in your ability to executing on it, and you just need money, then of course it is dumb to choose YC over other kinds of seed investment. As the author stated, it is relatively easy to get more money for less equity somewhere else. YC is easy money. You type up one short application and you give one short presentation and you are either in or out. If you lose all the money they give you nobody cares. Raising money other ways is not nearly so easy; if it is easy then you probably got it from people whose money you will feel very guilty for losing. From afar, YC seems to be a very college-like experience. PG is like the professor. The other founders are like your classmates. Your acceptance into YC is akin to that letter you received in the mail your senior year that made your mom cry because she was so proud--instant validation. When you get into YC you feel like you've succeeded regardless of whether or not your business fails. Once you are in, the environment is so confortable because it is just like the environment you've been in your whole life: people hovering above you, waiting to collect your homework every week. Other people who might be willing to fund a business are not going to offer such a friendly, comfortable environment. You actually have to read everything they want you to sign; you probably should have a lawyer look over everything before you even sign the initial agreement. You're going to hear "where's my money" in your head every time you talk to them. They are unlikely to appreciate the vital importance of a weekly dinner party.
edw519 18y ago
"I do think the most important metric is how Y Combinator alumni feel about the terms afterward." That's not a metric, that's an emotion. How to you measure a "once in a lifetime experience" that did happen vs. one that didn't?
byrneseyeview 18y ago
Thought experiment: if YC invested $0, for the same stake, how much would it reduce their number of applicants? My guess is that the reduction would be minimal. A small number of people would decide that it wasn't worth it, lots of people would live off of savings, and most of the rest would borrow (or find very early seed investors to do a preferred round) rather than miss out.
- pg 18y ago
  It would make us sloppy about who we accepted. While $20,000 is much smaller than a series A round, it is still a lot of money. It makes us think hard about who we want to fund. Plus there are some groups that really do need the money. Half at least.
  - byrneseyeview 18y ago
    Do they need the money in the sense that they don't have $20K in savings, or in the sense that they can't/won't borrow or raise the money in some way?
    - pg 18y ago
      At least in the first sense. Hard to say for sure about the second, since they don't need to.
mixmax 18y ago
There's actually a way of calculating how good the YC terms are. Basically what you want as an entrepreneur is to maximise your exit. The exit sum for a founder can be calculated as %ownership X salesprice. So if you add up all the founders that have exited, and see how much money they made on average, and then compensate for the companies that didn't make it you will come up with the average salesprice that a founder will get paid when his copmany is sold. Since YC has a track record by now you can simply do the calculation for YC and your seedfunding outfit of choice and see which gives a better payour for the average founder. There are a lot of nuances of course, maybe there's an extraordinarily large exit, some incubators hold on to companies longer, you can only estimate companies that heve either been sold or gone bust, etc. but it will give a pretty good rough idea.
dbul 18y ago
The hypothetical cannot win. This article spelled out what everyone already had some fuzzy idea about. But there are too many variables to draw any valuable conclusions. Many founders share at least one goal: to get rich. To a lot of first time entrepreneurs this means, "Whatever works." If YC has a 50% success rate (if) and your option of angel investment has a 27% success rate, what would you do? OK, maybe you need to hire programmers, but 3 months of undivided attention and 2 quality hackers can produce results stunning. Goldenson is right, he is biased because he has been in the game for a while now. His advice may be helpful to some, but a lot of smart people go through YC's program. Why? I hadn't even heard of Goldenson's self-described failed startup before yesterday. Yet, YC companies consistently get press as long as they are churning. If only we could factor these kinds of things into the equation. In his blog about his startup, Goldenson mentioned he spent $5,000 on PR. So what is YC's PR worth? This is just one example. Too many variables, many not easily expressed monetarily.
alain94040 18y ago
A lot has been said to rebut the math in the article. One more smart thing I'd like to point out about YC is that by making it a standard 6% for all, it removes any discussion on valuation. Those discussions tend to be very counterproductive: as the investor, I offer you X%. You feel insulted, you counter-offer. Repeat. By the time we are done and agree to terms, there is bad blood. The YC method? No discussions. You know the terms when you apply. End of story. We can all stay friends. Simple and elegant. Is 6% the right number? 1% would be rip-off. 5% is essentially the same as 6%. It's small enough that it doesn't impact the founders in the grand scheme of things, significant enough that YC gets some upside. Sounds fair to me.
- pg 18y ago
  It's not a standard 6% for all though. 6% is the median, but it has ranged from 2-10%.
sachinag 18y ago
I'm astonished that angels would put in $50K at a $2M valuation for a first-time team with a working prototype. That valuation seems waaaay too high to me.
- pg 18y ago
  Yeah, that was another wrong assumption. In this market, probably only around a third of YC-funded startups could get a $2m valuation after YC, let alone before.
- jon_dahl 18y ago
  FWIW, I've seen it happen more than once, and I haven't seen a lot of investment deals.
spolsky 18y ago
YC terms are a price. A price is set by a market. Asserting that "YC terms are poor" is like saying that YC's price is too expensive. If the price were too expensive, YC wouldn't have enough applicants. YC does, indeed, have applicants beating down the doors. So I would argue that their terms are actually a bit rich.
- rewind 18y ago
  I agree with what you're saying, but I'd be curious to know what the response to the program would be if terms started to move towards the funders and away from the founders. YC gets a lot of attention from their current terms, which means they have more choice and can be picky about who they fund. If they start asking for more equity or offering less money, I'm assuming they'll lose some of that choice. How much they'd lose is anyone's guess. Startups as a collective "product" certainly don't fit nicely on a supply/demand chart. It will be interesting as the years pass to see if the terms are adjusted and how the quality and/or quantity of funded companies moves with those adjustments.
- webwright 18y ago
  Really interesting to see that the author is the same guy who recently wrote this: http://venturebeat.com/2009/04/29/10-lessons-from-a-failed-startup/ http://venturebeat.com/2009/04/29/10-lessons-from-a-failed-s... His startup just died. I dunno if YC investment/credibility/free PR/advice would have kept it from dying, but I'd wager it'd help his chances by a meaningful amount. People should optimize less for their magnitude of personal success (should their startup succeed) and more for the chances of their company's success.
- bdr 18y ago
  One thing complicating your line of argument is that investment terms (as a price) are are significantly harder to value than cash. So it can make sense for people with more experience could to correct the under- or overestimation of inexperienced entrepreneurs.
lsc 18y ago
I think he misses the point. $12K is chump change. less than a month of contracting, at bay area sysadmin rates. The reason to do a ycombinator startup is the contacts. If pg was willing to trade me access to his contacts for 6% of my hosting company without requiring me to go into the 'sell to investors' rather than 'sell to consumers' market, I'd jump in an instant. (I've personally invested quite a bit more than $12K so far)
andrewljohnson 18y ago
Wow, that was an interesting article, but when he said a good domain name costs $5-$50k. Man, what is he smoking? Businesses don't depend on $50k domain names.
agrinshtein 18y ago
I like the provocation! You have gotten people thinking. Personally, from the writings and essays of Paul Graham I don't think his goal is to make money. He is a visionary with the intent of creating more value in the world for people. He, as an individual could go and do his own thing for the rest of his life and not bother with this. Hawaii here we come. However, as people look for purpose and meaning in life, when one looks back and sees that they were an integral part in creating a great deal of 'wealth' (the way he defines it)for the world that is very rewarding. Their terms ... Just as it is integral for them to give of their expertise and experience so too it is of equal and perhaps greater importance to be able to curb their giving. This empowers founders to dig deep within their own reservoirs of strength and character and develop their company with minimal resources, i.e. money. Just as a parent wants to give it is perhaps more important for him not to. It is important to discipline.

70 points by rokhayakebe 18y ago

The article operates under the assumption that all dollars are equal. The effect of being invested in by YC versus, say, my grandmother, are not the same. There are alot of other intangibles in play that are almost impossible to quantify. But that doesn't mean they can be safely ignored. It reminds me of the assumption of statistical independence in various machine learning problems where the variables are most certainly not independent... its just that including it makes the problem completely intractable, so even though everyone knows its wrong, they have no choice but to assume it.

jgrahamc 18y ago
"The effect of being invested in by YC versus, say, my grandmother, are not the same." That's a strawman argument. The OP isn't comparing YC to grandma, he's comparing it to an angel investment.
- lbrandy 18y ago
  Ugh. The strawman canard. I didn't -say- that was his argument, therefore its not a strawman . I was simply providing an example to illustrate (with hyperbole) the comment I made in the previous sentence. The one you snipped out. You've essentially repeated my point, elsewhere in this thread, by claiming that the value added comes down the "network" of said angels not just the personal networks but all of the non-financial considerations. Does being a YC versus an average angel-funded company get you more press? How many TC writeups, on average, do you think being YC funded gets you? How much money is that worth? How much page rank is that worth? This is important because he specifically talks about "marketing" as an important early expense, and yet YC provides quite a bit of it, for free.
aditya 18y ago
Are you making the smart money vs dumb money argument? Mark does address that: YC argues their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connections. Anyway, I think the real value YC brings is they give you an excuse to focus on your startup full-time like mad maniacs for 3 months. Try doing that outside of YC and people will just ridicule you. Being in YC also provides motivation during those post-idea-pre-prototype stages which are super hard.
indiejade 18y ago
He makes some great points. The ideal situation for entrepreneurs is to have VCs competing for equity in their companies: the more VCs out there, the better. OTOH, the ideal situation for VCs is to have tons of entrepreneurs competing for their dollars (hello TechCrunch 50). So while there will probably always be more entrepreneurs than VCs, dollars are almost certainly the most non-unique aspect in the value equation. I guess it's when they get into the big numbers where the little percents equal a lot that a more in-depth analysis is called for.
cageface 18y ago
Not really. He recognizes that YC might be worth some premium over another investor. He just questions the size of the premium.

Alex3917 18y ago

What the author misses is that it doesn't really matter what your seed valuation is because the equity of the seed investors gets super diluted by future rounds anyway. Once you've raised a series C the difference in equity for the founders is probably .2%.

jgrahamc 18y ago
Depends when you believe you are exit is going to be. If it's that you are going to get Series A and then get bought by BigCo for $x million then the initial terms make a big difference.
ph0rque 18y ago
Unless you're a company like Wufoo who don't get any funding beyond angel* because they reach profitability with that funding. * As far as I know
aditya 18y ago
Unless you exit before your Series A, which seems to be fairly common for YC companies: Reddit, Clickpass, Auctomatic come to mind... 6% at that early a stage might still be pretty high.
- nostrademons 18y ago
  If you exit before your Series A, you're probably pretty happy anyway. I dunno about you, but for me I don't care if I get $5M or $4.7M, I'd just be freaking glad to have a few million.
mattmaroon 18y ago
Well, it's not about absolute percentages but relative. If YC owns, at the start, 6% and the founders 94%, there will still be that roughly 15-1 ratio on cashout. It might be 15% and 1%, rather than 94-6, but it's still the same % less that the founders get.

GavinB 18y ago

The YC companies aren't being offered the 2M angel valuation, so it seems silly to compare them directly like this. There's nothing barring YC companies from taking more investment after the 3 months in which they go from an idea to a launched product. In fact, being in YC makes a company much more attractive to future investors. I'd say that the difference between an idea on paper and a complete product or prototype is probably 10x, so in that sense these numbers really seem reasonable.

jgrahamc 18y ago
"n fact, being in YC makes a company much more attractive to future investors." If this were Wikipedia I'd say [citation needed]. Also, are you comparing being in YC and having no support, or being in YC and having an angel investor? The latter is what the OP is talking about and argues that an angel gives more cash, for less equity.
- GavinB 18y ago
  The article asks “Is it worth 3 months working by yourself to get 10x a better deal?” It’s asking you to make a false choice. Which e-mail is a VC or Angel more likely to reply to: a) We worked three months on our own and built a prototype b) We were funded by YC for three months and built a prototype

sscheper 18y ago

Here were my thoughts: "my real suggestion is that Y Combinator should invest more" He's missing the whole point right here. Y-Combinator is like Twitter. Venture capitalists are like bloggers. With Y-Combinator, like twitter, people just didn't understand how so much value could come out of so little. At first, typing to someone in 140 characters is hopeless. Then you try it, and you realize how much can come out of so little--you become resourceful and cut out the fat you don't need. Hate to liken them to twitter, but hey, everyone's doing it... (best reasoning ever)

jgrahamc 18y ago
No, his argument is that as an entrepreneur you could get more cash for less equity by going to an angel. If you don't dispute that fact then the argument comes down to how much you value the YC network vs. an angel's network.
- pg 18y ago
  then the argument comes down to how much you value the YC network vs. an angel's network Not so. YC's "network" is not the important thing.
  - jgrahamc 18y ago
    But that's his argument isn't it?
    - pg 18y ago
      No; he gets that it's a matter of both "advice and connections," though he doesn't seem to realize how much more the former varies than the latter.
      - zackattack 18y ago
        So YC's principal value is the advice?

TomOfTTB 18y ago

SYC argues their advice and connections are worth this premium. I respectfully disagree. Advice and connections for even idea-stage entrepreneurs are easy to find with a little initiative, and if you don’t have that, you’ll fail as an entrepreneur. YC’s connections, Demo Day, and brand are indeed value-added, but it’s hard to argue they’re worth ten times an angel and free advice and connectionss I strongly disagree with this statement. As someone who was in the Valley at age 19 I can attest to how backwards many companies are run and how valuable it is to have an experienced entrepreneur guiding you. Of the companies I was around the major difference between success and failure was how much effort the Angel investors put in to mentoring their founders. As far as connections, I mean no offense to the author of this article but it's foolish to assume people will acquire connections as valuable as those Paul Graham has simply by showing up. The more I live in the world the more I realize it's all about connections and the doors that are opened through YC are easily worth an extra 4% In the end you can argue hypothetical numbers all you want but the reality is you have to make a company successful before it's worth anything. Good advice and industry connections are vital to making that happen.

lbrandy 18y ago
> As far as connections, I mean no offense to the author of this article but it's foolish to assume people will acquire connections as valuable as those Paul Graham has simply by showing up. You should go one step further because you don't even need to show up to get these connections with YC. YC is basically offering people the ability to email in their idea, and get funding, connections, and a network. I don't live in Silicon valley. I don't know any angels, personally. There are probably a very very very tiny few where I live, but not like the valley. I'd like to know about all these angels I can just effectively email with my idea to get money. That's what YC is offering. I reject the notion that there's all these angels out there offering a similar path and that they are easy to find.

colinplamondon 18y ago

It's amazing how effective "YC terms don't optimize your pre-seed valuation" linkbait is- this has to be the sixth article expounding on the same points.

zaidf 18y ago

Straw man. YC is MORE about the advice from pg, the alum network you are connected to and the long-term value of the connections you continue to make. That is the CORE value of YC--not the $ amount invested. If he thinks YC is poor, he should have based his arguments on how you can get better advice/connections etc. from raising angel than through YC. Instead he decides to take YC on the $ invested/valuation and merely glosses over the advise/non-$ value of YC. This is little more than a straw man.

davidw 18y ago
To be fair, unlike many of these articles, he does address this, even if you may not agree with what he says about YC's advice versus going it alone.
- zaidf 18y ago
  He spends ~1 out of the 12 paragraphs addressing the REAL argument. The other 11 are spent on addressing the straw man argument(that YC is good because of its valuation).

deleted 18y ago

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pg 18y ago

"Advice ... [is] easy to find" This is the mistake. Advice is easy to find, but it varies in value. This guy can correctly value our money. It's worth the same as everyone else's. But he has no idea whether our advice is good or bad, and if good, how much better it is than "average" advice, whatever that is.

trickjarrett 18y ago
I think another fallacy in his argument is that he is saying all Angel investors are worth the same outside of money. Sure, some angels will bring good advice, input and ideas to the table, but some will not. With YC you know there's a solid support infrastructure.
scott_s 18y ago
Not only does advice vary in value, but when you're new to an area, you probably lack the ability to evaluate advice on its own merits.
vaksel 18y ago
To be fair, noone knows if your advice is good or bad(essays notwithstanding). Can you give an example of some specific advice you gave to one of the YC startups recently?
- harpastum 18y ago
  I think the point of the essays and this community is to give startups an idea of the sort of advice they'll be getting [1]. Any "specific" advice would either be too close to the issues to have any meaning outside the company. As far as I can tell, PG has no qualms about "trade secrets"--if he thinks the advice would benefit everyone starting up a company, he will probably write an essay about it. If those ideas and themes resonate with you, you have an idea of what benefits you'll reap from the support of the YC staff. [1] Work hard to create wealth. ( http://www.paulgraham.com/start.html http://www.paulgraham.com/start.html )
- pg 18y ago
  Actually around 300 people know, because that is about the number of founders we've funded. So if people (e.g. those applying for funding) want to know if YC is worth it, we usually suggest they contact some and ask them individually. I could never talk about conversations I'd had with specific startups, because the more useful the advice was, the more precisely you'd be able to identify the startup.

Xichekolas 18y ago

I'm no expert on this stuff, but it seems like 10x improvement in terms for the Angel route is abusing some New Math. If a two person team goes with YC, and YC gets 6%, then the founders have 94% of the equity and $15k. If they go with the hypothetical Angel, who takes 2.4%, then they end up with 97.6% of the company and $50k. So yes, they end up with 3.3x the cash in hand, but only 3.8% more equity (97.6/94). And it doesn't seem to make sense to multiply those numbers to reach some good-for-headlines number like 10x. Not to mention the stated goal of YC has been "seed stage", which is presumably before, and not exclusive of, "angel stage".

nolanbrown23 18y ago
Doesn't YC require an option pool for employees, something along the lines of 15%? If so then the founders only own 79% of the company.
- wheels 18y ago
  Well, options are granted at the discretion of the board and YC doesn't take a board seat. Most companies will incorporate leaving some percentage of their stock unallocated. Founders only "lose" that percentage of their voting rights when they grant options to later people joining the company, which they'd probably do anyway.

briansmith 18y ago

The author of this article made a mistake in proposing the "more money cheaper" investors as an alternative to YC. In reality, YC and those investors target totally different segments of the market. If you have a good idea, you are confident in your ability to executing on it, and you just need money, then of course it is dumb to choose YC over other kinds of seed investment. As the author stated, it is relatively easy to get more money for less equity somewhere else. YC is easy money. You type up one short application and you give one short presentation and you are either in or out. If you lose all the money they give you nobody cares. Raising money other ways is not nearly so easy; if it is easy then you probably got it from people whose money you will feel very guilty for losing. From afar, YC seems to be a very college-like experience. PG is like the professor. The other founders are like your classmates. Your acceptance into YC is akin to that letter you received in the mail your senior year that made your mom cry because she was so proud--instant validation. When you get into YC you feel like you've succeeded regardless of whether or not your business fails. Once you are in, the environment is so confortable because it is just like the environment you've been in your whole life: people hovering above you, waiting to collect your homework every week. Other people who might be willing to fund a business are not going to offer such a friendly, comfortable environment. You actually have to read everything they want you to sign; you probably should have a lawyer look over everything before you even sign the initial agreement. You're going to hear "where's my money" in your head every time you talk to them. They are unlikely to appreciate the vital importance of a weekly dinner party.

edw519 18y ago

"I do think the most important metric is how Y Combinator alumni feel about the terms afterward." That's not a metric, that's an emotion. How to you measure a "once in a lifetime experience" that did happen vs. one that didn't?

byrneseyeview 18y ago

Thought experiment: if YC invested $0, for the same stake, how much would it reduce their number of applicants? My guess is that the reduction would be minimal. A small number of people would decide that it wasn't worth it, lots of people would live off of savings, and most of the rest would borrow (or find very early seed investors to do a preferred round) rather than miss out.

pg 18y ago
It would make us sloppy about who we accepted. While $20,000 is much smaller than a series A round, it is still a lot of money. It makes us think hard about who we want to fund. Plus there are some groups that really do need the money. Half at least.
- byrneseyeview 18y ago
  Do they need the money in the sense that they don't have $20K in savings, or in the sense that they can't/won't borrow or raise the money in some way?
  - pg 18y ago
    At least in the first sense. Hard to say for sure about the second, since they don't need to.

mixmax 18y ago

There's actually a way of calculating how good the YC terms are. Basically what you want as an entrepreneur is to maximise your exit. The exit sum for a founder can be calculated as %ownership X salesprice. So if you add up all the founders that have exited, and see how much money they made on average, and then compensate for the companies that didn't make it you will come up with the average salesprice that a founder will get paid when his copmany is sold. Since YC has a track record by now you can simply do the calculation for YC and your seedfunding outfit of choice and see which gives a better payour for the average founder. There are a lot of nuances of course, maybe there's an extraordinarily large exit, some incubators hold on to companies longer, you can only estimate companies that heve either been sold or gone bust, etc. but it will give a pretty good rough idea.

dbul 18y ago

The hypothetical cannot win. This article spelled out what everyone already had some fuzzy idea about. But there are too many variables to draw any valuable conclusions. Many founders share at least one goal: to get rich. To a lot of first time entrepreneurs this means, "Whatever works." If YC has a 50% success rate (if) and your option of angel investment has a 27% success rate, what would you do? OK, maybe you need to hire programmers, but 3 months of undivided attention and 2 quality hackers can produce results stunning. Goldenson is right, he is biased because he has been in the game for a while now. His advice may be helpful to some, but a lot of smart people go through YC's program. Why? I hadn't even heard of Goldenson's self-described failed startup before yesterday. Yet, YC companies consistently get press as long as they are churning. If only we could factor these kinds of things into the equation. In his blog about his startup, Goldenson mentioned he spent $5,000 on PR. So what is YC's PR worth? This is just one example. Too many variables, many not easily expressed monetarily.

alain94040 18y ago

A lot has been said to rebut the math in the article. One more smart thing I'd like to point out about YC is that by making it a standard 6% for all, it removes any discussion on valuation. Those discussions tend to be very counterproductive: as the investor, I offer you X%. You feel insulted, you counter-offer. Repeat. By the time we are done and agree to terms, there is bad blood. The YC method? No discussions. You know the terms when you apply. End of story. We can all stay friends. Simple and elegant. Is 6% the right number? 1% would be rip-off. 5% is essentially the same as 6%. It's small enough that it doesn't impact the founders in the grand scheme of things, significant enough that YC gets some upside. Sounds fair to me.

pg 18y ago
It's not a standard 6% for all though. 6% is the median, but it has ranged from 2-10%.

sachinag 18y ago

I'm astonished that angels would put in $50K at a $2M valuation for a first-time team with a working prototype. That valuation seems waaaay too high to me.

pg 18y ago
Yeah, that was another wrong assumption. In this market, probably only around a third of YC-funded startups could get a $2m valuation after YC, let alone before.
jon_dahl 18y ago
FWIW, I've seen it happen more than once, and I haven't seen a lot of investment deals.

spolsky 18y ago

YC terms are a price. A price is set by a market. Asserting that "YC terms are poor" is like saying that YC's price is too expensive. If the price were too expensive, YC wouldn't have enough applicants. YC does, indeed, have applicants beating down the doors. So I would argue that their terms are actually a bit rich.

rewind 18y ago
I agree with what you're saying, but I'd be curious to know what the response to the program would be if terms started to move towards the funders and away from the founders. YC gets a lot of attention from their current terms, which means they have more choice and can be picky about who they fund. If they start asking for more equity or offering less money, I'm assuming they'll lose some of that choice. How much they'd lose is anyone's guess. Startups as a collective "product" certainly don't fit nicely on a supply/demand chart. It will be interesting as the years pass to see if the terms are adjusted and how the quality and/or quantity of funded companies moves with those adjustments.
webwright 18y ago
Really interesting to see that the author is the same guy who recently wrote this: http://venturebeat.com/2009/04/29/10-lessons-from-a-failed-startup/ http://venturebeat.com/2009/04/29/10-lessons-from-a-failed-s... His startup just died. I dunno if YC investment/credibility/free PR/advice would have kept it from dying, but I'd wager it'd help his chances by a meaningful amount. People should optimize less for their magnitude of personal success (should their startup succeed) and more for the chances of their company's success.
bdr 18y ago
One thing complicating your line of argument is that investment terms (as a price) are are significantly harder to value than cash. So it can make sense for people with more experience could to correct the under- or overestimation of inexperienced entrepreneurs.

lsc 18y ago

I think he misses the point. $12K is chump change. less than a month of contracting, at bay area sysadmin rates. The reason to do a ycombinator startup is the contacts. If pg was willing to trade me access to his contacts for 6% of my hosting company without requiring me to go into the 'sell to investors' rather than 'sell to consumers' market, I'd jump in an instant. (I've personally invested quite a bit more than $12K so far)

andrewljohnson 18y ago

Wow, that was an interesting article, but when he said a good domain name costs $5-$50k. Man, what is he smoking? Businesses don't depend on $50k domain names.

agrinshtein 18y ago

I like the provocation! You have gotten people thinking. Personally, from the writings and essays of Paul Graham I don't think his goal is to make money. He is a visionary with the intent of creating more value in the world for people. He, as an individual could go and do his own thing for the rest of his life and not bother with this. Hawaii here we come. However, as people look for purpose and meaning in life, when one looks back and sees that they were an integral part in creating a great deal of 'wealth' (the way he defines it)for the world that is very rewarding. Their terms ... Just as it is integral for them to give of their expertise and experience so too it is of equal and perhaps greater importance to be able to curb their giving. This empowers founders to dig deep within their own reservoirs of strength and character and develop their company with minimal resources, i.e. money. Just as a parent wants to give it is perhaps more important for him not to. It is important to discipline.