

YC Terms are Poor - rokhayakebe
http://www.goldenson.com/?p=34

======
briansmith
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.

------
pg
"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.

~~~
vaksel
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?

~~~
pg
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.

~~~
vaksel
Well yeah, I was more talking about people outside looking in, like the
author, since he can't judge the quality of the advice he resorts to just
comparing the monetary terms

------
Xichekolas
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
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
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.

------
spolsky
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.

~~~
webwright
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-s...](http://venturebeat.com/2009/04/29/10-lessons-from-a-failed-
startup/)

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.

------
TomOfTTB
_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 connections_ s

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
> 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.

------
byrneseyeview
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
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
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
At least in the first sense. Hard to say for sure about the second, since they
don't need to.

------
sachinag
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
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.

------
zaidf
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
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
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).

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

------
GavinB
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
"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
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

------
colinplamondon
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.

------
agrinshtein
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.

------
mixmax
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.

------
Alex3917
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%.

~~~
aditya
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
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.

------
lbrandy
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
"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
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.

------
lsc
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
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.

------
edw519
"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?

------
sscheper
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
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
_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
But that's his argument isn't it?

~~~
pg
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
So YC's principal value is the advice?

~~~
pg
Yes. Number 1, product advice, and number 2, advice about dealing with
investors.

<http://ycombinator.com/about.html>

<http://www.paulgraham.com/ycombinator.html>

~~~
zackattack
Would it be possible to publish your product/dealing with investors wisdom
into a book?

~~~
pg
The essays I've been writing about startups are going to be such a book. Most
of the general advice I could give about investors, particularly, I've already
given, in e.g.

<http://paulgraham.com/fundraising.html>

<http://paulgraham.com/investors.html>

<http://paulgraham.com/startupfunding.html>

~~~
tezza
Your Submarine essay on PR has been especially valuable advice. I hope it
makes any folio/book.

It helped my tech-startup to gain the courage to spend a realistic amount on
such a vital area.

