
The New Deal - sama
http://blog.ycombinator.com/the-new-deal
======
chaseadam17
A lot of companies talk about changing the world, but Teespring really puts
their money where their mouth is. Not only have they been quietly supporting
us (Watsi) since the beginning, but to commit $50k to every YC non-profit is
truly incredible. Teespring is setting the standard for the next generation of
startups, and we're proud to call you guys our friends.

~~~
tomasien
Agreed it's amazing - are they getting anything in return? I'm not asking this
in a skeptical way, I just mean do the non-profits run tee-springs or are they
just donating money?

Either way, bravo!

~~~
chaseadam17
They're not asking for anything in return.

~~~
wellboy
Startups for Startups, they will get back way beyond what they gave away.
Great things will come to you if you're not asking for anything in return,
because people do remember.

~~~
tomasien
Oh totally! And I hope it was ultra-clear - I wasn't asking because I ASSUME
they wanted something in return, but rather because that's a proposition I've
never heard before. They're giving them $50k not $50k in tee-spring right? Or
is it $50k in tee-spring? I guess that's my question, but either way - too
cool! Proud of those guys, right thing to do.

------
chimeracoder
I predict that this is going to lead to an increase in the number of
applicants who have already raised some money (though not a full round).

> Most people don’t do YC for the financial investment—they do it because they
> want the advice, the help of the network, the benefits of the program, etc.
> But still, more money for less equity is definitely better.

This is good news for people who've issued convertible notes before YC, since
the implicit valuation is now $1.7MM instead of ~$300K. This is great for PR
purposes (read: bragging rights), but can also have concrete implications:

I know at least one company that had a sticky situation[0] when they were
accepted into an accelerator after already raising money from an angel
investor - the investor ended up owning a huge chunk (the majority?) of the
company on paper, because the note converted[1]. They didn't even need the
money (it was just a standard part of the accelerator).

[0] it was resolved in the end - but it caused extra headache and legal costs

[1] A well-written conversion clause in original note can also avoid this
problem (e.g. by including a threshold), but hindsight is 20/20 - I know a
number of companies that would have been impacted in a similar way.

~~~
LukeWalsh
I think it's also a great deal for first time founders and people who aren't
all that familiar with startup funding. $120k for 7% is a lot clearer than
$17k + $80k for 7% + converted shares no cap no discount.

I also think this is great news for what it will force other accelerators to
do. Many people out there claim to copy YC's model with much less friendly
terms on the convertible note. This puts everything out in the open if they
want to keep up.

~~~
rpgmaker
It's way clearer. Is there a book or a resource on the web to learn about
startup funding?

~~~
dangoldin
Not sure if you meant a book on the web but I liked Venture Deals -
[http://www.amazon.com/Venture-Deals-Smarter-Lawyer-
Capitalis...](http://www.amazon.com/Venture-Deals-Smarter-Lawyer-
Capitalist/dp/1118443616)

------
austenallred
I'm more excited about the effect this will have in general than the effect it
will have on YC companies.

The difference for a YC company is that they don't have to give up an extra
percentage as they raise their seed round to cover the convertible note/SAFE
that they got from YCVC. With no discount, if a YC company raised at a $10M
valuation that 80,000 would be worth .8% of the company - not enough to really
move the needle.

The difference for the industry as a whole is that most accelerators are
trying to mimic YC to a certain extent, and as YC now gives $120K straight-up
others might follow suit. It's really easy to say, "We give you 20K for 6-7%
because that's YC does." That seems to be almost industry standard, despite
the fact that $20K for 3-5 months can be really hard to live on. It will be
interesting to see how other accelerators react.

~~~
Edmond
POEM alert :affect...think you want effect :)

~~~
saraid216
What does POEM expand into? Urban Dictionary failed me.

~~~
Edmond
Professional Organization of English Majors :)

------
wiwillia
Just wanted to say that we're excited to be a part of the non-profit side of
YCombinator.

It's been humbling to have Watsi working with us in our office and watching
the amazing things they achieve on a daily basis. I have no doubt that amazing
non-profits will continue to emerge from YC.

~~~
morgante
You guys are awesome. It's rare to see a company willing to put real
commitment behind their talk of social good, and to see a startup doing so is
even more inspirational.

------
cperciva
I can't help thinking that this seems a little bit unfair. While there's a
nominal out for "exceptional cases", it seems to me that a company like Stripe
deserves a much higher valuation than a company like Tarsnap... not to mention
the difference between companies which are joining YC after they're already
established and companies which are merely a twinkle in their founders' eyes.

What exactly is the problem being solved by having a standard deal which
almost everybody gets?

~~~
sama
very few people do YC primarily for the money (though, as i said in the post,
more money for less equity is definitely better than the opposite!), and
whether a company is brand new or 6 months old, we think we can increase their
valuation by more than 7%.

~~~
eloff
What about a startup that comes to YC with a product and customers already as
opposed to just an idea? Surely they give up less than 7% equity? The risk for
YC is maybe an order of magnitude less and the equity % should reflect that
lowered risk (not saying .7% either, but lower.)

~~~
IgorPartola
Why would a company like that approach YC and not raise a round on their own?
Or better yet, reinvest every penny back into the business without giving up
any equity? Won't these companies just self filter?

~~~
eloff
Well maybe my example is unlikely, although one could argue that the YC brand
is worth something in that it will let you raise more from other investors.
However, it doesn't need to be so extreme, just that companies that are
further along are less risky to YC and it seems strange for YC to artificially
offer higher than market prices to said company thus lowering demand. Why
would YC want fewer lower risk companies and more high risk ones? The
incentives don't seem rational to me.

~~~
IgorPartola
I see this often, but I am starting to think this is a fallacy. A company can
be further along down the wrong path, making it harder to undo the bad things
it had done up to that point. A company can be based on an unsustainable idea
and no amount of work put into it will ever make it viable. I have a feeling
that real-world data is much more interesting than this. I imagine the risk
curves are not strictly decreasing with progress from idea to product with
users, and I bet YC could shed some light on this by showing when companies
actually close down vs when they start at YC.

------
rdl
The old terms weren't bad, but this is unquestionably better: simpler, and
higher valuation. Great news for everyone in YC.

I don't know if any other accelerators had the same core + YCVC investment
model, so I don't know what changes it will have elsewhere except maybe
pushing valuations at the accelerator stage a little closer to the demo day
amount. (Still higher than $1mm pre, in all but exceptional cases.)

(Also, WOW. The teespring guys are doing $50k for each non-profit? That is
amazing.)

------
Beliavsky
I have wondered if affluent parents can replicate at least the money part of Y
Combinator.

$120K is about the list price of two years of Harvard/MIT/Stanford . With a
son who loves to program, I have wondered if sending him to a cheaper school
and giving him the difference in installments after he graduates is better
than paying for a "name" school. It depends on the quality of the cheaper
school, of course. And I think school prestige matters more for investment
banking than tech, so I'd be less inclined to suggest a cheaper school to a
budding banker.

~~~
karamazov
Off topic, but if your son has the chance to go Harvard/MIT/Stanford, he
absolutely should. The difference is primarily in the caliber of the other
students, and it makes a world of difference to have such a concentration of
talent in one place.

(Note that I'm not saying there isn't talent elsewhere, just that there's an
incredible concentration of it in the top n schools.)

~~~
kapilkale
It doesn't necessarily make world of difference. When you compare students who
attended top private schools vs. those who were admitted but attended state
schools, they actually have equivalent incomes down the line.

What's likely happening is that really smart kids at good state schools end up
finding the pockets of talent there anyway.

Pretty scary implications for the value of a Harvard degree.

source:
[http://www.newyorker.com/archive/2005/10/10/051010crat_atlar...](http://www.newyorker.com/archive/2005/10/10/051010crat_atlarge?currentPage=all)

~~~
johnrob
To some degree, the elite universities are selling success to those already
predestined for it. This is an end game state for any popular institution that
accepts a subset from a pool of applicants. The battle to get in ends up being
a significant source of the value creation.

Raising a venture round from Sequoia is probably a decent non-academic example
of this. I would not be surprised if companies who turn Sequoia away are just
as successful as those who are funded by them (although the former is probably
a small data set!).

------
danielweber
Things I had to look up because I never knew or had forgotten:

LP is Limited Partner, basically an investor.

A safe is like a convertible note but better.
[http://ycombinator.com/safe/](http://ycombinator.com/safe/)

------
Patrick_Devine
The 17k for 7% is what always stopped me from considering the Y Combinator
route. It's a huge chunk of your company for not very much money. If the new
deal had been in place when we started, I think we would have been very
tempted to join.

The real benefits of YC though are the focus it brings you, and being able to
get access to the YC ecosystem. Oh, and being able to attend Demo Day, but
with so many companies in the YC program, I think Demo Day isn't what it used
to be (I think you get 90 seconds now?).

We would have loved to have had access to those resources, but since we had
already invested far more into our company in terms of cash, it's hard to
justify giving up that much equity for so little. Kudos to Sam for the new
program.

~~~
zmitri
17K for 7% isn't as raw a deal as you think when you realize that at an
"acceptance" into YC essentially doubles your valuation to most seed
investors.

~~~
Patrick_Devine
Absolutely. Being vetted by YC certainly won't hurt your company, but it's
still tough though when you've dumped $100k-$200k of your own money plus your
time and energy (which is not insignificant when you're an engineer in the
Silicon Valley), and you're giving up that amount of equity.

~~~
zmitri
Depends on what you're trying to achieve I think. I worked on my own stuff for
3 years before doing YC and it was well worth it. My thoughts after going
through the program:

If you have no product and no track record, it's definitely worth it.

If you have something working, but growth isn't amazing, it's a risk because
there's a chance you don't get the absolute most out of demo day due to timing
-- so one might feel what you describe. That said if you blow up later, I'm
sure they will do a fantastic job of getting you to the people you'd want to
meet with - eg. Homejoy.

But if you come into YC with good growth (like doubling in size every month)
it is without a doubt one of the smartest things you can do. You will probably
never have as much leverage as you get while going through YC.

------
nlh
This seems great - simple, better terms, higher valuation. Kudos @sama and YC.

Stepping back a bit, it's also a sign of the times -- especially given the
tone of the last paragraph, it's clear there's pricing pressure on
incubators/accelerators and the competition is heating up a bit. There are
more competitors in the space, valuations are rising, and YC is adjusting
accordingly. This isn't a good or bad thing per se -- just an observation of a
byproduct of capitalism and the realism of the market in 2014.

~~~
thatthatis
I have trouble deciding which part I like more: the simplicity or the better
valuation.

Unanimously positive move.

------
sanj
Getting accepted into YC immediately values your company at $1.7M.

~~~
cpeterso
Alternately, if your company is worth less than $1.7M then YC won't invest?

~~~
mcherm
As they made clear, YC is not necessarily out just to make a profit. (The
investment in non-profits, for instance, is clearly not profit driven.) Sure,
they'll make a profit, but that won't be the only driver.

Besides, at this stage, no company actually has a value. Companies have a
probability distribution of possible values... and it's a very diffuse
distribution.

------
devinmontgomery
This says a lot about the alternatives YC says it's really competing with -
the other things people who could build great startups would otherwise be
doing.

$17k is what two engineering students might have made at a summer internship
in Boston in 2005.

$120k is now what two entry-level engineers might make in six months in the
Valley.

------
tc_
sama: While you have our attention, you might as well explain the details
about the $120k/7% happening in two chunks.

[Edit 1:] Thanks; OK. I had read it as potentially indicating the money came
at two different times rather than just from two different sources. All clear
now.

~~~
sama
not much to explain--the reason for this is so that YC itself still has no
LPs, and can do new things like fund non-profits without being restricted by
an LPA. mechanically, the company gets two separate checks form two separate
legal entities--one for 20k and one for 100k--but they work with YC for both
of them.

~~~
cperciva
Is the 7% equity split pro rata between those two entities?

------
ebabchick
How can Teespring afford / justify giving every non-profit $50k?

~~~
diziet
They are a company with real revenue that's growing and they think the
publicity will sort of make up for it, so they don't end up losing too much on
it.

If yc does 5 nonprofits per batch, $500k is not a _lot_ of money.

~~~
mikeg8
I think your math is off. 5 NP's per batch * 50k = 250k from teespring which
makes your point even stronger.

~~~
borski
There are 2 batches a year.

------
jcchee88
What does it mean for a startup to be non-profit? When YC and Teespring each
invest 50k into a non-profit, do they expect a return on investment? or is it
purely a donation?

~~~
wiwillia
Purely a donation

------
jscheel
Props for cleaning things up. Startups have enough difficulties to overcome,
without having to spend time and brain cycles navigating a complex funding
structure.

------
huslage
Why do nonprofits get less money?

~~~
sama
we tried asking some foundations if they would do a similar deal, and
disappointingly they wouldn't. we will keep trying, but we wanted to get
something in place for this batch. 100k is not that different 120k. i think
it's pretty awesome that one of our startups is stepping up and being creative
when traditional supporters of non-profits were reluctant to try a new
approach.

~~~
sara125
What would be the benefit to foundations of doing a similar deal? Seems that
they mostly have passed on YC-funded nonprofits including Immunity Project and
Zidisha; and for good reasons. It seems that YC is a little behind when it
comes to nonprofits - funding things that were very popular years ago like
crowdfunding (Kiva comes to mind). These things are still exciting but they
aren't at the edge of nonprofit innovation today. Organizations like Sanergy
or GiveDirectly are really disrupting the nonprofit industry. Would love to
see YC make a bet like one of those.

------
billclerico
hey sam - is it 7% of common stock or preferred?

~~~
maxbrown
My understanding was that it was always common stock.

I believe this is the agreement:
[http://ycombinator.com/documents/YC_CSPA.docx](http://ycombinator.com/documents/YC_CSPA.docx)

------
iandanforth
I really like this model. There are plenty of people who enjoy haggling and
the finer points of contracts, but I'm not one of them. If all deals were this
simple I think SV startups would save a lot of time, headache and money spent
on lawyers.

------
mikikian
@Sama, is YC still encouraging founders to use SAFEs for their seed round or
is that dead?

------
crystaln
While going through YC for no money and 7% would probably be worthwhile for
many startups, simply for the exposure and advice, I know for a fact the
ostensibly terrible terms have deterred many good applicants. I tried for
years to apply to YC with a partner who insisted on not taking such terms.
While I think he was wrong (and perhaps that signaled some other problems with
the partnership,) I'm happy to see the issue go away. A valuation of $1.5-$2M
is quite fair for an early stage startup, particularly with the value-add of
YC.

------
hauget
Forgive my ignorance, but what does LP stand for?

~~~
rmah
LP = Limited Partners

It's how many VC funds are structured. General Partners run the thing, while
Limited Partners are investors with limited liability.

------
suyash
Seems like YC has come to realize how easy it is out there to get massive seed
funding. About time they upped their seed amount.

------
espitia
It would be great to see this annotated on RapGenius in order to learn all the
terminology and how investment like these work.

~~~
gomox
Here you go: [http://news.rapgenius.com/Sam-altman-the-new-deal-
annotated](http://news.rapgenius.com/Sam-altman-the-new-deal-annotated)

Feel free to comment (it's not very intensive in terms of VC deal terminology,
but I wanted to give RG a spin).

~~~
espitia
Wow, thank you so much. You made it really easy to understand.

------
iRaj
The simple truth is that the new deal is better than the previous one and
there is no denying the value add on that YC brings to startups. Also, the
fact that many accelerators and incubators would follow the YC lead and
increase their initial investments augurs well for the startup ecosystem. Well
done YC.

------
suyash
Sam: Time to update the 'New Deal' on the home page. It still mentions the
'Old Deal'.

------
ycaspirant
Upon getting accepted to YC, your company is promised $120K for 7%. Does this
imply that if your company is accepted to YC, then it is worth $1.7M (because
7% of $1.7M is $120K)? Or is this not the right way to look at it? Why / why
not?

~~~
jlevy
There are two chunks (as Sam mentions in his post) -- one chunk is for common
stock and the other is in the form of a Safe that converts to Preferred stock.

------
debacle
Is this going to change what the YC cycle looks like for the funded companies?

------
brandonhsiao
Can someone explain what the difference is between before and now? Is it that
before you could only spend $17k until you raised your next round but now you
get it all at once?

------
tsenkov
I don't know how much of this idea comes from Sam Altman, but YC looks better
and better since he took over.

------
shawn-butler
Has YC / Teespring taken a position on whether a L3C is a "non-profit"?

------
midas007
That's an immediate average valuation boost of around 5x.

(1.5 mil vs 300-ish k previously)

------
nsxwolf
This will help applicants cover the ever increasing SV rent.

------
snambi
this sounds simpler than the previous one.

------
samstave
> __ _$120k, which we hope is enough for the founders to run their business
> and pay their living expenses for at least 6 months, and sometimes longer._
> __

So, do you provide personal expense guidance to the founders?

How can I get, without joining YC, just this portion of the program ;)

------
Goopplesoft
> Most people don’t do YC for the financial investment—they do it because they
> want the advice, the help of the network, the benefits of the program, etc.
> But still, more money for less equity is definitely better.

I know advice is a big part of it but this is a exaggeration right? Most of
that network/benefits/etc that surrounds YCombinator is about the financial
investment.

