6 ms·

No matter how you slice it, ~$14k for 6% is a terrible deal.

by nawitus 13y ago

paul 13y ago
And if $14k is all you got, you would be correct. I feel like this is a test that screens out founders who don't understand value.
- nawitus 13y ago
  Or maybe founders who understand value, and can get a better deal elsewhere. Not everybody takes the YC hype at face value.
  - deleted 13y ago
    [deleted]
  - balls187 13y ago
    EDIT: Sorry, I just took a look at your LinkedIn Profile (love drinking Karhu in a Sauna btw...) It doesn't appear that you've created any startups, so I'm curious how you came to the opinion that YC is Hype and not worth the value to founders, if you yourself have not been a founder (and presumably) not gone through an accelerator?
    - nawitus 13y ago
      Ah, the goold old ad hominem attack. Clearly you can't review any movies because you're probably not a director?
      - balls187 13y ago
        It wasn't an attack at all. My question was very sincere--I was very curious how you've come to the opinion that YC isn't valuable to founders. > Clearly you can't review any movies because you're probably not a director? You shouldn't review a movie, until you've watched it. Also are we discussing movie reviews, or discussing whether YC is worth it?
      - deleted 13y ago
        [deleted]
  - mikeg8 13y ago
    If by "better deal elsewhere" you mean access to the same high quality advice, mentorship, and support the YC community provides (as expressed in this article and the tons of others like it), the answer is no, you cannot get that elsewhere. It doesn't exist. Most people in the startup world recognise that and that is how YC got it's hype. It is unmatched in the intangibles the YC experience provides and those intangibles have proven better at building successful startups than any alternatives. But keep looking for your better deal...
sokoloff 13y ago
You're giving up 6% of basically nothing at the moment most companies enter YC. If all YC did was write a check for $20K and walk away, I agree, it's too much. They do more than that, and I believe they increase your chances of meaningful success by way more than the 6.4% hurdle rate, so much so that if I were to do a startup, I'd apply to YC, even though the very last thing that I need from them is the $20K check.
- nawitus 13y ago
  The thing is, if you're good enough for YC, you can get $14k for ~0% of equity elsewhere.
  - wdewind 13y ago
    6% is good for the founder too. You want your investors to have a significant stake in the company so that they actually help build it, and you want to take on investors feeling like they will by definition give you a smaller piece of a larger pie. If you give them too little they wont help you at all.
    - nawitus 13y ago
      It's cheaper to pay people to help instead of giving equity.
      - wdewind 13y ago
        You can't afford the investor's time if your investors are people who will really help you. An investor does a LOT more than give you money.
        nik_adhia1 13y ago
        Tom who just commented on this above ^ - he's GoCardless (awesome tech btw!), one of the leading startups disrupting payments/direct debit in the London scene. They've been going from strength to strength and recently raised another huge round. Definitely validation that YC works and gives value.
mbesto 13y ago
Capital isn't the only thing they offer you.
jw2013 13y ago
What you suggested is a terrible thought. Because in the early stage of a startup, some (small amount of money + great alumni network + access to a pool of notable investor) will propels the growth so much more than the equity you gave up. "In the general case, if n is the fraction of the company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). For example, suppose Y Combinator offers to fund you in return for 6% of your company. In this case, n is .06 and 1/(1 - n) is 1.064. So you should take the deal if you believe we can improve your average outcome by more than 6.4%. If we improve your outcome by 10%, you're net ahead, because the remaining .94 you hold is worth .94 x 1.1 = 1.034." Source: http://paulgraham.com/equity.html http://paulgraham.com/equity.html
- nawitus 13y ago
  "the deal is a good one if it makes the company worth more than" Sure, if we assume that other deals are impossible. Which is a false assumption.
  - jaredsohn 13y ago
    No. By saying it is a "good deal", the GP is just saying that your average outcome would be better than doing nothing. It is still theoretically possible for better deals to exist. Edit: You aren't understanding my post; I just said that something can be a "good deal" compared to doing nothing regardless of what other options are available; i.e. YC offers a positive value proposition.
    - nawitus 13y ago
      Yes, YC is a good deal in an alternative reality where YC is the only choice. However, I talked about doing YC in the real world, where other alternatives exist.
      - jw2013 13y ago
        But the 1/(1-n) equation is still true no matter how many alternatives you have. The only change is if you have an alternative, say 10% for 1M from some VC, then you would ask yourself after I got 1M and the help VC, would the investment from YC still help my startup grow 6.4%? I think you are missing my assumption in my OP "in the early stage of a startup". In fact at that stage of startup, even if you have a better deal than YC, you might still want to do YC (so you would take both two deals) because even after your take the better deal, YC can still gives your startup >6.4% growth.
tlrobinson 13y ago
Hundreds of companies would disagree.
6cxs2hd6 13y ago
The following is a half-formed thought, so feel free to pick it apart. I think there is a class of companies that really do not require outside funding. They could very feasibly bootstrap (grow from cash flow). Often this would be a superior financial result for the founders, and possibly lifestyle. However that assumes the founders know what they're doing -- have a good business model, and know how to execute it. Sometimes they don't. They need help -- advisors, compatriots, whatever. If you want certain "elite" advisors to help you, the only way they're going to be interested is with some equity upside. Otherwise it's just not meaningful for them, either financially or in terms of "impact". So my suggestion is that founders should ask themselves if they really need funding, or if they really need advising, or if they actually need both. If they need both, something like YC is probably a bargain.
wiwillia 13y ago
Hi Nawitus. I completely understand that line of thinking, and it should have been especially true for us given that we'd been running for about 1 year and had $1m in sales at the point where we joined YC. What I can tell you is that we thought about in the same way as bringing on a co-founder or superstar employee. The value of YC isn't measured in their investment, but rather the value they bring. Even in terms of the boost to our valuation alone from the validation, beyond everything else, YC more than paid for itself. If you look at our growth graph there's also a sharp inflection that starts shortly after we joined the program. That could be unrelated, but it's my strong belief that it was the value of the program that helped us accelerate.
- nawitus 13y ago
  Everyone seems to compare "doing YC" to "not doing YC", which is a false comparison. YC can easily be better than not doing anything, but that doesn't mean it's even close to the best alternative. You could've sold 4% of equity for x million $ and used that to grow your business, for example.
  - wiwillia 13y ago
    I see what you're trying to say, but money is often not the issue - it's the connections and expertise that are so valuable. In my humble, and admittedly limited, opinion the network and community and shared experience/expertise that YC brought far outweighed any million dollar investment we could have taken (and no investor would have even considered giving us millions). We ended up raising millions (about $22M in the last year), and I don't know if it would have been possible without YC. All our investors and intros came through the network we built while in the program. Hope that makes sense, of course this is all my opinion and you can evaluate and come to your own conclusion - I just wanted to share my experience and perspective!
  - swampthing 13y ago
    You can still sell equity for cash as a YC company - many do, in fact! As an aside, I think your numbers are a bit unrealistic. Even if you were to sell 4% for $1m, that's a $25m valuation. That's definitely higher than what most YC companies are worth prior to entering YC (and even right afterwards).
balls187 13y ago
Not really, when you consider that most people are first time founders, and the experience, network, and social proof they gain is worth significantly more. Not every YC company is going to be the next DropBox, or AirBNB, but many do go on to grow to later stage startups. Also, if you think the only value of YC is the $14k stipend you get, then myfriend, I think that YC and other accelerators are not for you. Full Disclosure, I'm not a YC alum.
argumentum 13y ago
The best test of this would be what the customers (yc founders) think. I'm pretty sure most would happily donate 6% to YC for what they do. If you were to think rationally, the only question is whether YC would improve your outcomes by more than 6-7%. If that's true, it should be a no-brainer.
- jaredsohn 13y ago
  >If you were to think rationally, the only question is whether YC would improve your outcomes by more than 6-7%. If that's true, it should be a no-brainer. I'm questioning the tautology of what you wrote. It is a no-brainer if you don't have other choices. If you do have choices, though, you might not be able to choose to get funded from all of them if the programs might take place at the same time. Also, while accelerators generally don't request much equity, there is a hard limit (unlikely to get hit at this stage) where you need to maintain some equity for the founders and employees.
  - argumentum 13y ago
    If you have YC as a choice, there might as well not be other choices (at least in terms of "accelerators"). It therefore isn't a question of should I do YC or (some other accelerator) .. but rather should they do an accelerator period. If that's a yes (you're at the right stage for it) then I'd argue it's pretty much a no-brainer if you get in.
    - jaredsohn 13y ago
      I don't feel this is a proper response to my comment. This thread had been talking about how one should take money from an accelerator if it offers a greater chance of success compared to the dilution it results in; it hasn't compared the merits of YC versus other accelerators at all. Your earlier comment mentioned how rational the decision was, but I'm saying that it isn't rational based on what was written earlier in the thread since other programs weren't taken into account at all. That said, based on my understanding of the accelerator space, I'd probably prefer YC to other options. Some reasons you maybe would prefer something else (guessing) would be if it conflicts with an accelerator that is very domain specific, although I'm not sure if such a situation would happen that couldn't be worked around.
asdad 13y ago
Couldn't agree less. What's more, is see this advertisement of YC on this news channel, and tons of people who went to YC defending YC? 6% equity for doing nothing while the best employees work like slaves and get nothing more than bread?! (I don't count introductions/connections as work - Sorry guys.) - Clearly YC seems to have figured out how to get the good startups together and milk them of 6% for doing nothing! How hard is it to figure that out - oh here is one formula - "ou're growing your revenue and sales by 10% every week for 80 weeks - awesome - give us 6%" - these companies have already proved themselves. No Steve Blank's book is not worth 6%, nor is introductions. They will come for free, just decline your YC invitations.

No matter how you slice it, ~$14k for 6% is a terrible deal.

by nawitus 13y ago

No matter how you slice it, ~$14k for 6% is a terrible deal.

paul 13y ago

And if $14k is all you got, you would be correct. I feel like this is a test that screens out founders who don't understand value.

nawitus 13y ago
Or maybe founders who understand value, and can get a better deal elsewhere. Not everybody takes the YC hype at face value.
- deleted 13y ago
  [deleted]
- balls187 13y ago
  EDIT: Sorry, I just took a look at your LinkedIn Profile (love drinking Karhu in a Sauna btw...) It doesn't appear that you've created any startups, so I'm curious how you came to the opinion that YC is Hype and not worth the value to founders, if you yourself have not been a founder (and presumably) not gone through an accelerator?
  - nawitus 13y ago
    Ah, the goold old ad hominem attack. Clearly you can't review any movies because you're probably not a director?
    - balls187 13y ago
      It wasn't an attack at all. My question was very sincere--I was very curious how you've come to the opinion that YC isn't valuable to founders. > Clearly you can't review any movies because you're probably not a director? You shouldn't review a movie, until you've watched it. Also are we discussing movie reviews, or discussing whether YC is worth it?
    - deleted 13y ago
      [deleted]
- mikeg8 13y ago
  If by "better deal elsewhere" you mean access to the same high quality advice, mentorship, and support the YC community provides (as expressed in this article and the tons of others like it), the answer is no, you cannot get that elsewhere. It doesn't exist. Most people in the startup world recognise that and that is how YC got it's hype. It is unmatched in the intangibles the YC experience provides and those intangibles have proven better at building successful startups than any alternatives. But keep looking for your better deal...

sokoloff 13y ago

You're giving up 6% of basically nothing at the moment most companies enter YC. If all YC did was write a check for $20K and walk away, I agree, it's too much. They do more than that, and I believe they increase your chances of meaningful success by way more than the 6.4% hurdle rate, so much so that if I were to do a startup, I'd apply to YC, even though the very last thing that I need from them is the $20K check.

nawitus 13y ago
The thing is, if you're good enough for YC, you can get $14k for ~0% of equity elsewhere.
- wdewind 13y ago
  6% is good for the founder too. You want your investors to have a significant stake in the company so that they actually help build it, and you want to take on investors feeling like they will by definition give you a smaller piece of a larger pie. If you give them too little they wont help you at all.
  - nawitus 13y ago
    It's cheaper to pay people to help instead of giving equity.
    - wdewind 13y ago
      You can't afford the investor's time if your investors are people who will really help you. An investor does a LOT more than give you money.
      - nik_adhia1 13y ago
        Tom who just commented on this above ^ - he's GoCardless (awesome tech btw!), one of the leading startups disrupting payments/direct debit in the London scene. They've been going from strength to strength and recently raised another huge round. Definitely validation that YC works and gives value.

mbesto 13y ago

Capital isn't the only thing they offer you.

jw2013 13y ago

What you suggested is a terrible thought. Because in the early stage of a startup, some (small amount of money + great alumni network + access to a pool of notable investor) will propels the growth so much more than the equity you gave up. "In the general case, if n is the fraction of the company you're giving up, the deal is a good one if it makes the company worth more than 1/(1 - n). For example, suppose Y Combinator offers to fund you in return for 6% of your company. In this case, n is .06 and 1/(1 - n) is 1.064. So you should take the deal if you believe we can improve your average outcome by more than 6.4%. If we improve your outcome by 10%, you're net ahead, because the remaining .94 you hold is worth .94 x 1.1 = 1.034." Source: http://paulgraham.com/equity.html http://paulgraham.com/equity.html

nawitus 13y ago
"the deal is a good one if it makes the company worth more than" Sure, if we assume that other deals are impossible. Which is a false assumption.
- jaredsohn 13y ago
  No. By saying it is a "good deal", the GP is just saying that your average outcome would be better than doing nothing. It is still theoretically possible for better deals to exist. Edit: You aren't understanding my post; I just said that something can be a "good deal" compared to doing nothing regardless of what other options are available; i.e. YC offers a positive value proposition.
  - nawitus 13y ago
    Yes, YC is a good deal in an alternative reality where YC is the only choice. However, I talked about doing YC in the real world, where other alternatives exist.
    - jw2013 13y ago
      But the 1/(1-n) equation is still true no matter how many alternatives you have. The only change is if you have an alternative, say 10% for 1M from some VC, then you would ask yourself after I got 1M and the help VC, would the investment from YC still help my startup grow 6.4%? I think you are missing my assumption in my OP "in the early stage of a startup". In fact at that stage of startup, even if you have a better deal than YC, you might still want to do YC (so you would take both two deals) because even after your take the better deal, YC can still gives your startup >6.4% growth.

tlrobinson 13y ago

Hundreds of companies would disagree.

6cxs2hd6 13y ago

The following is a half-formed thought, so feel free to pick it apart. I think there is a class of companies that really do not require outside funding. They could very feasibly bootstrap (grow from cash flow). Often this would be a superior financial result for the founders, and possibly lifestyle. However that assumes the founders know what they're doing -- have a good business model, and know how to execute it. Sometimes they don't. They need help -- advisors, compatriots, whatever. If you want certain "elite" advisors to help you, the only way they're going to be interested is with some equity upside. Otherwise it's just not meaningful for them, either financially or in terms of "impact". So my suggestion is that founders should ask themselves if they really need funding, or if they really need advising, or if they actually need both. If they need both, something like YC is probably a bargain.

wiwillia 13y ago

Hi Nawitus. I completely understand that line of thinking, and it should have been especially true for us given that we'd been running for about 1 year and had $1m in sales at the point where we joined YC. What I can tell you is that we thought about in the same way as bringing on a co-founder or superstar employee. The value of YC isn't measured in their investment, but rather the value they bring. Even in terms of the boost to our valuation alone from the validation, beyond everything else, YC more than paid for itself. If you look at our growth graph there's also a sharp inflection that starts shortly after we joined the program. That could be unrelated, but it's my strong belief that it was the value of the program that helped us accelerate.

nawitus 13y ago
Everyone seems to compare "doing YC" to "not doing YC", which is a false comparison. YC can easily be better than not doing anything, but that doesn't mean it's even close to the best alternative. You could've sold 4% of equity for x million $ and used that to grow your business, for example.
- wiwillia 13y ago
  I see what you're trying to say, but money is often not the issue - it's the connections and expertise that are so valuable. In my humble, and admittedly limited, opinion the network and community and shared experience/expertise that YC brought far outweighed any million dollar investment we could have taken (and no investor would have even considered giving us millions). We ended up raising millions (about $22M in the last year), and I don't know if it would have been possible without YC. All our investors and intros came through the network we built while in the program. Hope that makes sense, of course this is all my opinion and you can evaluate and come to your own conclusion - I just wanted to share my experience and perspective!
- swampthing 13y ago
  You can still sell equity for cash as a YC company - many do, in fact! As an aside, I think your numbers are a bit unrealistic. Even if you were to sell 4% for $1m, that's a $25m valuation. That's definitely higher than what most YC companies are worth prior to entering YC (and even right afterwards).

balls187 13y ago

Not really, when you consider that most people are first time founders, and the experience, network, and social proof they gain is worth significantly more. Not every YC company is going to be the next DropBox, or AirBNB, but many do go on to grow to later stage startups. Also, if you think the only value of YC is the $14k stipend you get, then myfriend, I think that YC and other accelerators are not for you. Full Disclosure, I'm not a YC alum.

argumentum 13y ago

The best test of this would be what the customers (yc founders) think. I'm pretty sure most would happily donate 6% to YC for what they do. If you were to think rationally, the only question is whether YC would improve your outcomes by more than 6-7%. If that's true, it should be a no-brainer.

jaredsohn 13y ago
>If you were to think rationally, the only question is whether YC would improve your outcomes by more than 6-7%. If that's true, it should be a no-brainer. I'm questioning the tautology of what you wrote. It is a no-brainer if you don't have other choices. If you do have choices, though, you might not be able to choose to get funded from all of them if the programs might take place at the same time. Also, while accelerators generally don't request much equity, there is a hard limit (unlikely to get hit at this stage) where you need to maintain some equity for the founders and employees.
- argumentum 13y ago
  If you have YC as a choice, there might as well not be other choices (at least in terms of "accelerators"). It therefore isn't a question of should I do YC or (some other accelerator) .. but rather should they do an accelerator period. If that's a yes (you're at the right stage for it) then I'd argue it's pretty much a no-brainer if you get in.
  - jaredsohn 13y ago
    I don't feel this is a proper response to my comment. This thread had been talking about how one should take money from an accelerator if it offers a greater chance of success compared to the dilution it results in; it hasn't compared the merits of YC versus other accelerators at all. Your earlier comment mentioned how rational the decision was, but I'm saying that it isn't rational based on what was written earlier in the thread since other programs weren't taken into account at all. That said, based on my understanding of the accelerator space, I'd probably prefer YC to other options. Some reasons you maybe would prefer something else (guessing) would be if it conflicts with an accelerator that is very domain specific, although I'm not sure if such a situation would happen that couldn't be worked around.

asdad 13y ago

Couldn't agree less. What's more, is see this advertisement of YC on this news channel, and tons of people who went to YC defending YC? 6% equity for doing nothing while the best employees work like slaves and get nothing more than bread?! (I don't count introductions/connections as work - Sorry guys.) - Clearly YC seems to have figured out how to get the good startups together and milk them of 6% for doing nothing! How hard is it to figure that out - oh here is one formula - "ou're growing your revenue and sales by 10% every week for 80 weeks - awesome - give us 6%" - these companies have already proved themselves. No Steve Blank's book is not worth 6%, nor is introductions. They will come for free, just decline your YC invitations.