
New Standard Deal - katm
https://blog.ycombinator.com/new-standard-deal/
======
sethbannon
Great that YC is simplifying their deal and making it more standard and easier
for founders to understand. Also great that they're switching the standard
SAFE to be a post-money SAFE, as this will eliminate a lot of confusion around
dilution that resulted from the complicated math of the old standard SAFE.

Interestingly, unless I'm understanding this incorrectly, this change might
mean a worse deal for founders going through YC. As the post mentions, when
calculating the dilution taken from a post-money SAFE, all other money raised
on convertible instruments before an equity raise are excluded.

Functionally, what this means is that while investors on standard SAFEs are
diluted by other SAFE investors before an equity round (as are all common
holders), investors on post-money SAFEs are not diluted by other investors on
SAFEs before an equity round.

So unless I'm misunderstanding this, I believe this means that YC (which was
previously a common holder like the founders) will no longer be diluted by the
money founders raise on convertible notes or SAFEs before an equity round,
whereas before they were diluted by that money.

To demonstrate this, I modeled out a scenario where a company goes through YC,
raises $2m on a $10m cap pre-money SAFE after demo day, and then raises a $10m
Series A equity round at a $30m pre-money valuation. Scenario A shows the old
YC deal where YC has 7% common, and Scenario B shows the new YC deal where YC
invests on a post-money SAFE

Scenario A:
[http://angelcalc.com/model?mod=802&dispShare=0e55666a4ad822e...](http://angelcalc.com/model?mod=802&dispShare=0e55666a4ad822e0e34299df3591d979)

Scenario B:
[http://angelcalc.com/model?mod=803&dispShare=8a50bae297807da...](http://angelcalc.com/model?mod=803&dispShare=8a50bae297807da9e97722a0b3fd8f27)

Note: click "Model" to see the results. In Scenario A, YC is listed as "YC"
and in Scenario B YC is listed as "Post SAFE-0 (2.1mm)". As you can see YC
ends up with 1.575% more equity in Scenario B.

The simplicity of this change is great but it's important that founders
understand the downside as well. Team YC, if I'm misunderstanding this, please
let me know.

~~~
jasonkwon
It's clear you put time and thought into this post, so it deserves an
equivalent amount in response. I think you’ve understood some things
correctly, but not others, but that’s why we're on HN - to help clarify.

(1) The modeling you’ve done for the premoney safes is correct, but it’s
incorrect for the postmoney scenario. That’s because Angelcalc hasn’t been
updated yet for postmoney safes that track the one we released. Angelcalc
includes the Series A option pool increase in both flavors of safes, because
what people were doing when flipping standard premoney cap safes to postmoney
cap safes is they were just changing the pre to post, and nothing else. We
deliberately took out the Series A pool increase for reasons that are all
detailed in our post. That means both we and the safe holders share the Series
A pool increase with the founders, which is not how it’s working on Angelcalc
(but we will update it soon).

Also, in your postmoney scenario, the valuation cap for the $2M safe needs to
be adjusted to be a $12M postmoney cap safe.

So if you update the postmoney scenario using all of your variables based on
the postmoney safe we released, the results are different. I did it by hand on
excel - here’s a screenshot:

[https://imgur.com/m4V51SH](https://imgur.com/m4V51SH)

Happy to send you a copy of the excel file. Also, to be perfectly transparent,
these examples are somewhat artificial because they assume a 0% option pool
issuance in both cases, which is unlikely to be the case. Safe investors will
do better than in the screenshot I sent the more options that are issued
before the Series A round. They also have the option now to ask for a template
side letter to participate pro rata in the Series A round itself.

(2) The YC deal should be viewed together with the money founders will raise
at demo day, i.e. as one continuous round, and thus the combined % of the
company you end up selling. That combined % for YC and demo day safes was
often too high in the old deal because founders had a hard time understanding
how dilution was unfolding. Safe rounds may not have been priced correctly
because of that lack of clarity. With these new changes, the days of raising
on safes and not knowing how much you owned are over. The days of planning a
Series A fundraise not knowing how much you’ve already been diluted are over.
We strongly believe that founders will end up less diluted by the combined %
of YC and demo day safes. It’s interesting that you would characterize an
uptick in YC ownership as “downside” for the founders. I don’t think founders
look at our ownership - they look at theirs.

(3) An underlying assumption of your post is that the safes and YC deal are
changing, but everything else — valuations, option pools, amounts people raise
and dilution transparency (or lack thereof) — will remain the same. The point
of us doing this though is that we expect it to change all of those other
things. Everything is tied together. As Michael already pointed out, once you
can see what’s happening, both investors and founders can take better actions
on both fronts. High-res fundraising should also become easier, as Carolynn
points out on
[http://ycombinator.com/documents](http://ycombinator.com/documents).

~~~
sethbannon
Thanks Jason for the thoughtful reply, and thanks also for your work on
simplifying and improving the YC SAFE. I think these improvements will benefit
the entire ecosystem (founders & investors & employees) by making it easier
for everyone to understand SAFE dilution.

Still not clear on how (in most cases and assuming there is not a 0% option
pool pre-equity round) this will not lead to increased expected dilution for
founders from the YC deal as compared to the old deal, so would love to play
around with your Excel sheet. My email is my HN username at gmail.

~~~
jasonkwon
Sure - just sent to you.

~~~
sethbannon
Played with your excel and while the difference is not the same as I
calculated with AngelCalc, it still seems the dilution from this new YC deal
will be greater than the old YC deal post-equity round in basically every
circumstance.

Essentially, with this new deal, after equity financing YC will own 7% minus
the dilution from the equity round minus dilution from any options pool
increase [1]. Previously, after equity financing, YC would own 7% minus the
dilution from the equity round minus the dilution from the SAFE round.

While it's true founders are getting a little bump on YC absorbing the
dilution from a Series A option pool re-up, in my experience these are
typically 5% to maximum 15% increases. Whereas the dilution from post-YC SAFE
rounds are typically 15% to maximum 30%. So YC is assuming a potential 5-15%
dilution in their ownership while avoiding a 15-30% dilution in their
ownership. Translation: YC will own more post-equity financing than they would
in the old deal.

This puts a burden on the founders to make up for that increased dilution by
raising the post-YC SAFEs at a higher valuation than they otherwise would,
which will likely make those raises harder. Alternatively, they can raise
their Series A at a higher valuation than they otherwise would to make up for
YC's extra ownership, but that will make those raises harder than they
otherwise would be. So there is a real dilution downside for founders here.

1: in reality YC will continue to own 7% after the equity round because
they'll exercise their pro-rata right during the equity round but that doesn't
change the underlying point being made here so will ignore it for simplicity.

~~~
jasonkwon
I answered your first model comparison with point #1. Can't use it here since
I don't know what other scenarios you're modeling out.

I think points #2 and #3 continue to apply. You can't say that the new
framework will result in more dilution in "basically every circumstance,"
because that assumes all of the surrounding aspects of the circumstances will
continue to remain the same. I can model out a scenario for you as well that
shows a thoughtful founder now able to better plan out a round using a series
of escalating valuation caps, rewarding the earliest investors, to raise the
same amount of money but for less overall dilution, in precisely the manner
described by PG in his original post. Or another scenario where investors are
ok with slightly higher valuations because they have certainty of ownership.
Or another scenario where a founder who previously would've raised an
unnecessary extra 5% now doesn't, because the dilution math is clearer.

Your point about safe dilution being 15-30% is exactly right, and exactly one
of the reasons we're doing this. The high part of that range is too high.
People are raising too much, on too dilutive terms, because of the lack of
transparency. Founder dilution is driven by what everyone else on the cap
table is getting, not just us. If that sum total of "everyone else" is still
less, founders are still net better off. If you want to frame the dilution
aspect all indexed to YC ownership, that's ok, but the outcome was already
pre-figured by your choice of framing in the first place. We can agree to
disagree on that.

That said, I think one thing we can definitely agree on is that the success or
failure of this new framework will be judged by whether founders are more or
less diluted in the end, and have a harder or easier time raising money. We've
already made our bet, so there's not much to do here but let it play out.

~~~
abalone
For us mere mortals following along... I don't necessarily understand what you
guys just debated about the impact of options pools but I did grok this from
the spreadsheets: In the new model,

Founder stake goes 48.8% -> 49.6%, a modest 1.63% increase.

YC stake goes 3.68% -> 4.55%, a whopping 24% increase.

Other SAFE investors stake declines 12.5% -> 10.8%, a 13% decrease.

So while the immediate impact on founders appears negligible (assuming all
variables stay the same), it would seem that this new model represents a
fairly large transfer of ownership from other SAFE investors to YC.

Wouldn't this be a cause of concern for founders? If SAFE investors have a
particular percentage ownership in mind, wouldn't this push founders to raise
more from them (or give a discount, etc.) and thus increase dilution?

~~~
sethbannon
You've nailed it. Becaise of YC's increased ownership, founders will either
have to raise less from SAFE investors or take more dilution, because this
change won't make those SAFE investors be willing to pay higher valuations.
That's the downside.

------
adw
> $500k safe at a $10 million post-money valuation cap means the founder has
> sold 5% of the company.

This is a common oversimplification, but it's somewhat dangerous and I would
be happier if people were more cautious in what they said here. It simply
doesn't mean what you said; it means the founder has sold _at least 5%_ of the
company. If you're going to either raise 50m or shut the company and ditch
your investors, then it's a wash; but if find yourself in a low-money scrappy
situation, which realistically is where most non-YC companies are, it's very
significant.

Convertibles and other structurally similar securities, in contrast to priced
equity rounds, essentially have built-in down-round protection for investors.
They have advantages, too, not least the speed in which deals can be done, but
if you can do a priced round or a convertible round at similar speed and at
similar cost, give serious consideration to taking the priced round.

~~~
jasonkwon
Everything you say is fair. On the point about "at least 5%," this is
addressed in footnote #3 to the blog post. It's true that it's a
simplification, but that's partly what makes the construct easier to work
with.

I think the other thing to take into account is that if you're doing a
comparison of safes, notes and priced rounds, it's not just a matter of seeing
if speed and cost are equal, but what else you might have to give up in terms
of rights. Priced rounds can come with downround protection too (often do), as
well as board seats and investor vetoes on financings, sales of the company,
etc. Convertible notes are debt so the investors will have a technical right
to demand their money back after a set time (maturity).

~~~
adw
Yep. I'm essentially arguing that simplifying here is dangerous, _no_
construct is easy to deal with, and I'd rather more care were taken (broadly
across the entire industry, not singling out YC here) in representing that.

Also: these terms are completely reasonable and under normal circumstances if
I were doing a startup – and this valuation made sense – they'd be terms I'd
be happy to take. For the avoidance of doubt, all of this is about the
marketing, not the substance; the substance is above reproach.

As you say, speed, costs, rights (board seats, information, pro-rata, drag-
along/tag-along, you name it), pref structure, etc are all real things. I just
prefer addressing those all up front.

~~~
jasonkwon
Cool. Appreciate the thoughtful feedback.

------
stephenhuey
I'd love to see YC or someone release a definitive recommendation on fair
equity distribution among the employees of the company. Maybe there'd be a few
variations on it to handle differing scenarios, and even if it's really hard
to have a one-size-fits-all I think it'd be similar to their SAFE note which
tries to offer a pretty good deal to all involved.

~~~
jasode
One of your favorited links is "Holloway Guide Equity Compensation"[1] and it
has a section of typical percentages. It also mentions some higher percentages
for employees which are not typical.

As for "fairness", it's going to ultimately be in the eye of the beholder. You
could give employee #12 a 5% stake (which is CEO level at other startups) and
yet that employee still feels it's "unfair" even it's explained that he's
getting more than anybody else in SV. It's human nature for the employee to
think he's worth _more_ , and for the employer to think he's worth _less_ \--
and therefore, they negotiate.

[1] deep link to the employee ownership percentages:
[https://www.holloway.com/g/equity-
compensation#_there_are_no...](https://www.holloway.com/g/equity-
compensation#_there_are_no_hard_and)

~~~
stephenhuey
Thanks for reminding me! I've thought about this a lot from time to time, and
I realize I forgot to mention something else besides just the equity
distribution.

I've heard plenty of stories of nasty ways companies wrangle hard-earned
equity out of employees. I think it'd be great for YC or someone of similar
stature to encourage companies to use very standard terms to avoid a lot of
the unkind ways employees get screwed. One example would be terribly short
windows for exercising options.

~~~
jasonkwon
re: short windows for exercising options:

[https://triplebyte.com/blog/fixing-the-inequity-of-
startup-e...](https://triplebyte.com/blog/fixing-the-inequity-of-startup-
equity)

[https://blog.samaltman.com/employee-
equity](https://blog.samaltman.com/employee-equity)

[https://news.ycombinator.com/item?id=11198991](https://news.ycombinator.com/item?id=11198991)

[https://a16z.com/2016/07/26/options-
plan/](https://a16z.com/2016/07/26/options-plan/)

[https://dangelo.quora.com/10-Year-Exercise-Periods-Make-
Sens...](https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sense)

------
spraak
What does "safe" mean in this context?

~~~
antimatter15
Simple Agreement for Future Equity
([https://en.wikipedia.org/wiki/Simple_agreement_for_future_eq...](https://en.wikipedia.org/wiki/Simple_agreement_for_future_equity_\(SAFE\)))

------
mpenn
Overall, simplifying how to understand one's cap table is great. It gets in
the way of many founders understanding their business in really pernicious
ways.

I do believe this will change the dynamic for YC founders dramatically 1 - 3
years out if not ready for a Series A (equity round) but need more capital
(seed extension). I know many people who raised $500K - $3mm more on SAFEs.
Because they were pre-money, the dilution for stacking SAFEs worked. Now, that
will be much harder. The next round of financing will need to be an equity
round to convert SAFEs to equity. I don't know if this is good or bad, but it
will push people very heavily towards an equity round if they need any more
funding.

~~~
mwseibel
It would still be very easy to raise a bridge round on SAFEs at a higher cap
(or the same cap). Not sure why there would be a push to equity round. Even
better, you'll know your dilution after the bridge round which will better
allow you to plan for the A.

~~~
mpenn
My understanding is that additional post-money SAFEs dilute solely common,
whereas additional pre-money SAFEs dilute common and other pre-money SAFEs. So
if you want to do a new round, by doing an equity round, you can dilute the
post-money SAFEs with common. But if you do a 2nd post-money SAFE round,
solely common gets diluted.

Since keeping cap flat is logistically / emotionally easiest for both sides to
swallow, the founder dilution is worse under a "flat" scenario. In the pre-
money world, if you did pre-money $10mm cap and raised $2mm, then later
another $2mm at same cap, common would own ~71% (10 / 14) on conversion
(assuming A is high enough). In post-money world, if you do $12mm cap and
raise $2mm (so equivalent to old world in 1st round), then later raise another
$2mm with same cap, common would own 67% (8 / 12). That's just 4 - 5%, but a
real difference.

So I believe the incentive is higher to do an equity round to convert the
post-money SAFEs so they can be a part of the dilution of the new round.
Unless I am mistunderstanding how they'd convert or something else here. The
math is complicated (which I guess is the whole point of why moving to post-
money will improve founders' understanding).

------
hemantv
YC Safes are great way to raise money for early stage startups. It allow them
to focus on business which is most important during early stages.

This is right step in simplifying it even further.

~~~
neom
We raised on safes, it was harder because some VCs don't like them as they've
not really been litigated yet (or something) - but I tend to agree they're a
great convertible security. Lets end this pre-money nightmare, cap table hell.

------
marssaxman
What is a "safe" exactly?

~~~
mwseibel
[http://www.ycombinator.com/documents/](http://www.ycombinator.com/documents/)

~~~
ai_ia
Michael, do you know where can I find stats for the number of founders per
company accepted in YC?

Edit: I found it here. [https://blog.ycombinator.com/common-misconceptions-
about-app...](https://blog.ycombinator.com/common-misconceptions-about-
applying-to-yc/)

~~~
katm
The average for the last batch was 2 founders.

~~~
dasmoth
This is one of those cases where the word “average” is kind-of unhelpful.
Mean? Mode? Median?

~~~
streulpita
I would guess Median is also 2.

------
bbrunner
Great to see this happen again after the original "The New Deal" in 2014[0].
I'm a big believer in having enough capital to not have to worry about day-to-
day costs so you can focus on actually running and growing your business, and
this feels like a good sort-of "cost of living" increase.

[0] [https://blog.ycombinator.com/the-new-
deal/](https://blog.ycombinator.com/the-new-deal/)

------
amirhirsch
Nice to see the offer getting better! I wonder about moral hazard in early
stage funding. What if YC were to offer rent and salary for founders for 12
months? This would similarly change the dynamics around founders worrying
about money while avoiding some of the temptation to over-spend and generally
waste funding before building a product.

~~~
mwseibel
Seems like the founder should be the one who figures out how to best spend the
money no?

~~~
unstuckdev
Someone should do a study to see if the lottery effect--where winning the
lottery leaves you worse off because you don't know how to handle that much
money--is at work with VC funding.

------
adamzerner
> But startup costs have undeniably increased over the past few years. We
> thought a $30K increase was necessary to help companies stay focused on
> building their product without worrying about fundraising too soon.

I didn't realize that this was true. I'm interested in hearing more about what
has caused the increase in startup costs.

~~~
snowmaker
Primarily cost of living increases for the founders. Things like hosting and
other services have gone down.

~~~
adamzerner
Ah, that makes sense. Thanks.

------
pedalpete
I fail to understand how the YC deal operates as a SAFE with 7% equity?

If the SAFE is a non-priced round, then the amount of equity the investor gets
is decided when the conversion happens, so it is an unknown, which is why a
cap exists.

Is YC taking 7% + the conversion?

------
Animats
That's friends and family size money. Why get a VC at that scale?

~~~
JumpCrisscross
> _Why get a VC at that scale?_

A dollar of VC is generally worth, _ceteris paribus_ , more than a dollar of
friends & family money. The coaching, connections, reputation boost when
talking to other investors, sales prospects, potential employees, the media,
_et cetera_ are meaningful.

~~~
tptacek
That seems certainly to be true of YC, but I'm less certain about VC in
general. YC aside, the major benefit of VC money is that it can make getting
_more_ VC money easier, since it's bundled with social proof.

------
wasd
How representative are the terms outlined in the example? 18.25% for 1.6M
where the lead paid 1m for 6.25%? I've never raised money before so I don't
know.

~~~
jasonkwon
Michael's other blog post has some numbers:

[https://blog.ycombinator.com/yc-has-
changed/](https://blog.ycombinator.com/yc-has-changed/)

------
andrewstuart
What are the practical implications of "post-money cap safe"?

Could someone please explain this in laymans terms?

~~~
jasonkwon
Both you and your investors will have much better visibility into what % of
the company you are selling and they are buying when you are fundraising. It
really is as simple as that.

------
aassddffasdf
So $150,000 is enough runway for what: 0.6 man-years? Sounds legit.

~~~
tptacek
The idea isn't that you go for years on the YC 150k. For most YC startups, the
idea is that the social proof of getting through YC buys you access to the
market for syndicated convertible debt rounds, which, while talked about
extensively on HN, are not all that easy for first-time founders to access
without YC's help.

So really, YC is giving you some money to get through demo day, at which point
you'll raise real "runway" money from seed funders.

There's a cohort of YC founders that only do YC (or, at least, rely on YC's
money for a long time before raising further); those companies get to break-
even cash flow quickly and often aren't (or aren't yet) on the "shoot the
moon" trajectory VCs are looking for. But those companies aren't made or
broken by YC's decision to "fund" them.

------
atrilumen
Let me stay in Medellin, and you're on.

------
xmly
Standard deal does not have a discount?

~~~
daniel_levine
no need for a discount if there's a cap. Discount is nice if you don't want to
try and set a cap/price, but if you're OK setting a cap then it effectively
grants a discount

~~~
simonebrunozzi
Incorrect. A cap means that above the cap, no discount matters. Below the cap,
however, the discount is applied.

Example: raising 1M at 10M cap, 20% discount.

Scenario 1: next priced round at number below 10M - the cap doesn't apply, the
discount does.

Scenario 2: next priced round at number between 10M and 12M - the cap doesn't
apply, the discount does.

Scenario 3: next priced round at more than 12M - cap applies, discount
doesn't.

In short, either cap OR discount are applied, whatever is the most beneficial
to the investor.

~~~
jasonkwon
I think Daniel was working off of a different understanding of 'discount.' I
think he meant a discount off of the price of the next round (Series A). If
the Series A is $30M pre but you set a valuation cap on the safe of $20M post,
you are getting a 'discount' on the conversion of the safe in the Series A
(because it is lower than $30M pre).

You're right though that there's a flavor of safes that contain both a
discount and a valuation cap, and the investor gets the benefit of whichever
approach results in more shares, and your explanation is good.

