

Ask YC/PG: Is it ok for me to accept angel funding before getting into YC? - marcamillion

I recently applied to YC. On the application I put that there were no other investors. However, since then, there has been interest and I have an investor anxious to close pretty quickly.<p>It's not a significant stake, and more of just providing a buffer - if I need it.<p>Will it affect my application if I accept the investment and how would you guys handle that - if I am accepted - given that a new legal entity will be created by you guys. I would want to carve out a portion of equity from the new entity for them - is that something that is a deal breaker/stopper for you guys?<p>Thanks.
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pg
It's not a deal-breaker unless it's botched. The right way to do it would be
to use a convertible note written so that YC funding wouldn't trigger
conversion. If you have a lawyer who can arrange that. But you'd have to
incorporate, and you (and we) would then be stuck with however you did, so
we'd hope you did it right.

If it's a small amount, is it enough to make the legal bills worth it?

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marcamillion
That's exactly what I was thinking about. Having the first round post-YC
funding, trigger the conversion. That way, the sweetner is that if I am
accepted, and it so happens that the w11 rounds are anything like S10 (i.e.
largely convertible notes), then it works out better for them then because
they would be converting to equity while the later stage investors are just
getting their notes.

I was trying to avoid running up large legal bills, for the amount considered.

The investor can be considered 'friends and family'. I was thinking that maybe
we do up a general agreement on some terms - i.e. everything that a 'standard
convertible note' would have with a few tweaks. Then if I am accepted into YC,
I then formalize it then - with the documentation that you guys have.

Would that suffice, or would you still want me to do everything with an
attorney first?

As an aside, I am not in the US - so doing the official legal documentation
and incorporating up there might be more tricky, if I were to do everything on
my own (which is why I was thinking of a general agreement with acceptable
terms on both sides - with specifics to be hashed out later upon
incorporation).

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anamax
> I was thinking of a general agreement with acceptable terms on both sides -
> with specifics to be hashed out later upon incorporation

Starting a company is hard enough without building it on a ticking bomb. It's
one thing to make a desk from a couple of sawhorses and a board, it's quite
another to play lawyer.

Why do you think that you know enough to get this stuff right?

BTW - not just any attorney will do, you need one who has actually done angel-
funded startups before in the relevant jurisdiction.

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marcamillion
I understand that is the general rule of thumb, and I do agree with it. But I
am simply looking at the economics of it.

Does it make sense to spend $4K (for example) on legal fees for a deal where I
am getting an $8K investment. These aren't the actual figures, but I imagine
the legal fees would be at a similar ratio.

~~~
anamax
> Does it make sense to spend $4K (for example) on legal fees for a deal where
> I am getting an $8K investment. These aren't the actual figures, but I
> imagine the legal fees would be at a similar ratio.

Does it make sense to risk your startup over an $8k investment?

> But I am simply looking at the economics of it.

Are you looking at economics or merely comparing two numbers, whether or not
they're the right numbers? The cost of doing it wrong is not limited by the
amount invested, let alone the amount of money you "save".

Yes, there's some chance that you might not screw it up, or that your company
might fail anyway, rendering the whole thing moot.

How much is the additional risk actually worth?

