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Facebook’s stock should trade for $13.80 (marketwatch.com)
105 points by xickan on May 25, 2012 | hide | past | web | favorite | 105 comments

The researchers found that the revenue of the average company going public between 1996 and 2010 grew by 212% over the five years after its IPO.

Assuming that its five-year return is equal to the stock market’s long-term average return of 11% annualized, Facebook shares currently would need to be trading at just $13.80.

I'm as bearish as anybody on FB but this seems like extremely lazy analysis. FB may be many things but average is certainly not one of them.

FB may be many things but average is certainly not one of them.

Several of the other comments you have received relate to this idea, so please allow me to ask a specific question (directed both to you and to onlookers). What is not average about Facebook? For some commenting here, the specific question I have is what is above average about Facebook, related to its revenue, to suggest it will overperform the average of historic experience of companies that have IPOed? As an investor, interested in a non-lazy analysis, what should I look for to decide whether or not Facebook is a good investment at the current price of its stock? I note that you wrote,

I'm as bearish as anybody on FB but this seems like extremely lazy analysis.

so I'm not specifically asking you for a rationale for buying Facebook. Other comments at this comment level or below imply that there may be a rationale (perhaps unconvincing to you, but perhaps convincing to some onlooker) for buying Facebook's stock at today's price. What rationale is that? If I had some extra money, would I be well advised to invest it in Facebook stock? Why or why not?

I'd appreciate hearing from anyone who has an analysis that goes deeper than the news headlines of the last week since the Facebook IPO. Thanks.

Bearish == skeptical. I don't intend to buy FB and I think it's overvalued.

But I say that because I think FB's style of social networking is a fad, not because I believe crude aggregate statistics of internet companies in general tell us something useful in FB's case.

Social networking is not a fad. If anything it's becoming an underlying utility of the internet much like email, instant messaging and search. Any technology that's so core to the internet starts out as a standalone application (hotmail, AIM, Google) and becomes an underlying layer.

Facebook's advantage? They have a virtual monopoly on this utility. Not only that, switching costs are high (unlike email and search).

Look at the kind of growth apps gets from integrating with Facebook (Instagram, Viddy, Spotify). All social apps going forward will only reinforce their position by integrating with them.

People used to say exactly the same things about Compuserve and AOL. Internet castles tend to be built on sand.

Generally speaking it's that they haven't had their 'ah-ha' moment of monetization yet that Google had with ad-words.

Some think it'll never come. But it's a factor.

They have, and it was facebook credits. If that didn't maximise their profits then nothing will.

Well, the analytical question here is: what is the appropriate sample for comparison?

The article uses US IPOs 1996-2010 as the initial sample. I'd like to know how sensitive this is to expanding or narrowing that range. How does that average change if you adjust the range? (The academic article may have some note of this.)

Then, the article makes comparison to Google's current price-to-sales ratio as a benchmark (5.51-1). The analytic justification is nothing more than "[s]ince Facebook FB -0.64% is most often compared to Google GOOG -0.66%..."

Some questions I'd ask about this:

- What did Google's P/S ratio look like at IPO, and what was its growth?

- What does Facebook's P/S ratio look like compared a broader sample of tech companies' P/S ratios? Or including non-tech companies?

- Why not use price-to-earnings ratio? (I'm not a finance guy, but the subtle difference in wording here gives me pause to at least investigate the question.)

So what you're hearing me say is: we need sensitivity analysis. The assumed benchmarks appear arbitrary enough that we have to see how the results change when you adjust the inputs.

Lastly, there's the age-old fundamentals versus intangibles question: investors make their decisions based on both. The fundamental analysis (of earnings, etc., like the article does) is not deterministic: it just gives you context. Intangibles (faith in management, broader understanding of how the market will shift and affect the firm's competitive position) matter, too. They're just, well, intangible.

But also included under the umbrella of intangibles is how investor sentiment toward the company may change. If people think FB is going to make some huge announcements in the next year that will send the share price skyrocketing for a short (but not sustainable) high watermark, then that potential short-term return is worth buying.

[Edit 5/25 6:57a PT - changed range from 96-00 to 96-10 based on correction. Thanks!]

The article says the analysis uses the 1996-2010 timeframe, not 2000, so that is a few more IPO's.

You don't want to use price to earnings for a company in a growth phase like this. The reason is that they are likely spending their revenue to grow the business (in the simplest example, buying more servers and staffing up).

I think what makes Facebook above average is that at IPO they are looking better than Google did at IPO. I think we can all agree Google is above average.

1) Current P/E is 74 (Google IPOed at 132 and was proven to be undervalued).

2) Facebook has higher revenues than Google did at IPO.

3) Facebook has more users, and more engaged users than Google did at IPO (though there is some question as to whether or not FB can continue to grow users).

Yes, they have to figure out the "facebook way" of delivering ads, but if they do...

Google IPOed into a growing market. It is not clear how FB's market or ARPU will grow from here.

They left negative money on the table at the table at the IPO. Good for them, and probably good for their long-term prospects (big buffer), but from a retail investor perspective, the business has a lot of catching up to do to meet the market.

I actually agree with the $10-15 conclusion right now, but the business has a chance to make up some of that gap before the share price goes there. Probably.

(not invested, and happily so)

A lazy analysis but look at revenue they're getting from payments. From their S-1:

Mar 31, 2011: $94MM Mar 31, 2012: $186MM

Obviously it's only two data points but payment revenue has grown 100%. Payments revenue only represents 10% of their total revenues.

WRT to this, the question becomes whether they could ramp up payments. I'm guessing that their main driver for payments revenue is games.

They recently launched offers. That could potentially drive revenue.

I think that Facebook should take on Square and enter the payments market. They're in a unique position to create Facebook Wallet.

The biggest barriers I see from this is that Zuckerberg would have to drive this kind of strategy and it doesn't seem like a move he'd take.

The main argument is that Facebook has created a platform that reaches nearly 15% of the entire planet. Nothing like this has ever happened this fast. Coke and other consumer brands may have similar or even larger markets, but it took them many, many years to get there.

Standard bubble talk: "This is historically unprecedented! Everything is going to be different this time!"

Two issues:

1. FB doesn't behave like the sample mean

2. FB doesn't behave like the sample

1 does not mean 2. In fact, without any statistics of dispersion (which the Kauffman paper doesn't provide) we cannot rule on 2 whatsoever.

A. We're in a bubble.

B. We're not in a bubble

A. You're saying things people also say when we're in a bubble, so we're in a bubble

B. I'm saying things people also say when we're not in a bubble

B. You, on the other hand, are saying the exact things people say when we're not in a bubble

A. I'm saying things that those that are right also say when we are in a bubble

B. Well, I'm saying things that those that are right also say when we "are not" in a bubble.

It's all standard talk, both your comment and what you're responding to and it all gets said both inside and outside of bubbles. What 'is being said' is never an argument. Everything is always 'being said'.

You would have said the same thing about Google and Amazon last time around. For some reason, they were different. Don't make predictions if you don't have an outstanding track record to back them up. Otherwise, nobody has any reason to believe you.

Yes and no... considering FB's incredibly massive eyes on page, today, which might not last... they've been pretty bad about monetizing and they've had about 6 years of knowing they were huge to do it. That's not a great track record (as far as making big returns)

Sure. It's not hard to construct all kinds of failure scenarios for FB. I just don't think that crude averages are much use here at all.

In general I think that an average just isn't a very useful statistic. It throws away way too much information.

It would be interesting to note what the standard deviation is on those figures. My guess is it's quite high, which does give Facebook a bit of breathing room.

I'm surprised how often a mean is quoted without a standard deviation. Especially in an analysis like this. It's only telling you half the story.

Reading Peter Thiel's lecture notes and I think it is the sixth one that goes into great detail about the returns of new companies following a power law. Hence, the average is mindbendingly irrelevant.

I am certainly not buying into facebook, but not due to this analysis.

if it is a power law in the sense that a few companies return a lot, whilst most return a little, how does that make the mean irrelevant?

the mean of a power law of this form is more skewed by the few companies returning a lot than it is by the majority. assuming that more than 50% of the companies return a little, the median would be irrelevant, but the mean is very sensitive to outliers.

Consider four companies' returns: [1, 1, 1, 100]. The median, 1, is a reasonable predictor for the next company's return. The mean, 25, doesn't seem like a likely outcome.

there is not a normative way to discriminate between those two predictions.

it comes down to what kind of loss you incur for making an incorrect prediction. for mean, it's a squared loss (which penalizes you for being wrong in the tails more heavily) but for a median it's the absolute loss.

the argument being made was that fb is an outlier and (as I read it) the mean didn't reflect it, so the maths was "lazy" as it didn't take that into account. actually the mean does take these outliers into account (since it's corresponding loss function penalizes you harshly for being wrong in the tails) and so is probably not too unreasonable at predicting on outlier companies (certainly better than the median).

That's actually a great point. Even after reading those notes I still wouldn't have thought of applying the power law to my thinking about Facebook (I don't think Facebook will prove anything special long term but it's always useful to be critical in your thinking and consider multiple points of view).

As an aside, those notes are an incredible way of thinking about the world differently. I've gotten a lot out of it.

"New companies" versus "companies that go IPO" are completely different categories.

It's an obvious point when you think about it. This is survivorship bias: many new companies fail (with a return of ~zero) before becoming a part of the IPO sample.

Yes, but a Pareto distribution looks just the same if you left censor it at some point.

> FB may be many things but average is certainly not one of them.

Do you mean the assumption of 212% growth over 5 years is lowish? If so, I agree.

As for the average return: the author is fixing a price at T+5years, so if you assume a higher-than-average expected return for Facebook, then its current stock price should be even lower.

Also note that even as a back-of-envelope estimate, his analysis is flawed because the 212% figure was calculated by comparing revenues adjusted for inflation, while the 11% figure is for non-adjusted total return. The corresponding real (inflation-adjusted) average return is 7%:


I think it's even lower than 7% if you go back far enough: http://home.earthlink.net/~intelligentbear/com-dj-infl.htm

The truth is, the stock market, given a long enough timespan, barely beats inflation.

I'm not even going into how they change official statistics arbitrarily on a particular time period, but the article itself says that "Dividends are excluded, so the chart only shows capital gains. The dividend yield of the S&P is running near 2%."

So, 1.9% above inflation plus 2% dividend yield, plus 2.3% current CPI, plus 2.7% "shadow CPI" (the number is from that article you posted) you get a 9% return. That means that facebook should be worth more, not less (since you are discounting at a lower rate).

Also the dividend payout has not been 2% for all time - back in the 50's it was around 7%.


> The truth is, the stock market, given a long enough timespan, barely beats inflation.

I want to believe that.

FB is a much larger company than the average IPO. Larger companies often grow slower as they dominate their markets. With 900 million users, it would seem that the developed countries are fairly saturated and won't see much growth in the user base.

I would be interested to see some projections for FB costs over the next five years. They no longer have the lure of pre-IPO equity to attract new employees. They might have to pay higher salaries instead. Many insiders will be cashing out in the coming months and moving on, so I would guess that FB salary costs are going to climb significantly.

900 million users are not their customers, they are the product. I'm sure that there are lots of people and companies that haven't been advertising themselves on facebook so far -- I'm not suggesting they should, it's just the market isn't really saturated.

Agreed. I read this and said "You are looking back to 1996? Seriously?" Now I am sure that the market will figure out what to do with the company but I sure as heck don't see these guys shorting a few hundred million shares.

But there is a lot of challenges in wrapping your head around the economics here as well. This is why a lot of people don't understand Google's profitability either.

The 1996 to 2000 period was remarkable as the dot-com IPO crazy period. It's the closest, and most optimistic investment environment to what we are seeing today, thus makes a good comparison for making an optimistic valuation model for Facebook.

Are you serious? The two periods are hardly comparable. See link.


That is a great paper btw. It's nice to see some analysis of the impact of velocity on startups and IPOs rather than just regulation.

Too bad the study's period was 1996 to 2010.

Actually, it's June 1996 to December 2005 [1]

[1] http://bear.warrington.ufl.edu/ritter/post_ipo_report_052220... (page 9, Panel C)

Facebook should trade for what Facebook is trading at at the moment in time Facebook is trading.

The end.

Wow. That's so insightful, I think you've single-handedly rendered every research division at every investment bank obsolete. Consider switching careers.

"This company is trading at this price, which is appropriate because this price is what the company is trading at. My recommendation is to purchase shares in this company then sell them at a higher price later on. Alternately, we can short this company's stock, and then profit when the price falls."

Yes, but as someone said, "the market can stay irrational longer than you can stay solvent".

John Maynard Keynes said that.

Thanks for the heads up! I thought it was some anonymous on Twitter ;)

... and I hope he's being sarcastic.

This is an article speculating which direction Facebook's stock is going to go in the coming months and years. The efficient-market hypothesis is about as relevant to that as prayer.

I think you are missing the point. The whole conversation about what something should be trading at is stupid. It is worth what it actually trades at. If it wasn't worth the trading price then it wouldn't trade at that price. What it should trade at is always what it trades at so it is foolish to speculate about what the price should be. If enough people will realize that the stock is over-valued, over-hyped and over-priced it will very quickly start trading at the price it "should" trade at.

The GP's comment reminds me of the famous Bill Parcells quote: "You are what your record says you are".

And how does anybody go about realizing that the company is overvalued? The market doesn't work via black magic. People have to think and reason about it.

If I purchase stock in a company one week at $33/share, and the next week that same stock is trading at $23/share, it is highly unlikely that the stock was worth what I paid for it, unless something unforeseeable happened to that company during that week which dropped its value by nearly a third. Market capitalization is only an estimate of real value. The only reason the stock market tends to do such a good job of estimating it, is that so many people are doing their homework before deciding to purchase a share.

Articles like this and discussions like this are critical to a healthy market. They help people decide if they should buy or not, and so they promote market efficiency and accuracy.

A quick collapse of the price would be best for everyone, except for the "muppets" who bought FB shares in the IPO. Especially for Facebook, who would otherwise see an exodus of employees who can make more in terms of vesting credit at companies whose share price does go up. I do think a market cap of >$50 billion is sustainable based on the size of the warchests at Microsoft and Apple. If they could only ever buy one company, it would be Facebook.

Ive never seen so many bearish articles about a company before. That's probably a good sign if you are bullish on FB... Here in Sweden we have brokers who market how to short FB big-time!

I've never seen an 100b valuation IPO before either. I suspect both are related. :P

with P/E at ~100 there's no way to be bullish if you've got anything resembling a brain... yeah, i don't have amazon either.

Google went public in 2004 at ~200x earnings and is up 457% since then.

Apple went public in 1980 at ~100x earnings and is up over 15,000% since then.

I'm not saying that Facebook is Google or Apple, but there's a lot more to analyzing a company than looking at P/E and calling it a day.

Google's revenue growth for the year prior to IPO (2003) was 234%. Facebook's was 88%. Sorry, but Google was a massively better business.

Doesn't that just support the point that looking at P/E alone is useless?

No, that supports the point that looking at P/E alone is not enough. Searching for a spouse? Maybe you should not only look at her/his diplomas or music tastes alone.

I think that's exactly what people are basing their bets on... that Facebook just hasn't figured out a way to monetize properly, but that it will.

That's a really freaking huge "what if". Facebook is not exactly a young company, founded 8 years ago. They've been trying to find a killer business model for many years. I wonder what makes people believe they will find one.

If Facebook was $14 a share, I'd sell everything else and buy nothing but FB.

Based on what? Based on the fact that FB IPO'd at 38 so 14 suddenly seems cheap? Are you simply looking at price or other things also, like outstanding stocks, revenue, future potential etc. or just a single number "14".

What if FB has twice the number of outstanding stocks, so todays 38 would have been effectively 19, would you still have done what you're saying.

This is the fundamental problem with a lot of folks, they just look at the price, and why stocks normally go up when split, it "looks" cheaper but nothing has changed.

That's pretty ballsy, I'd suggest you keep a little reserve, just in case. Staggered buy-in is a good way to hedge your bets if you are going to buy only one company.

If fb was down to 14, many things about the company fundamentals would be different. There'd be a reason for it to have dropped by more than 50%.

Instea of going all in and buying the stock, consider options.

I think that the GP's statement was made ceteris paribus.

Naturally, if there was some new information available about the company fundamentals that caused FB stock to drop to $14, it would only be a good buy if you could determine that the market overreacted.

I admit I needed to google your Latin. For anyone else, ceteris paribus: "all other things being equal"

The author is assuming that stock performance is inherently linked to internal company metrics, which is simply a naive assumption. P/E ratio is not the holy grail of valuating companies, there are countless other stocks other than GOOG who have been growing for years despite having a huge P/E ratio.

for example?

Maybe they should charge users fees to protect their privacy rather than focus on charging advertisers? 10 dollars a year to not sell your data to advertisers. 20 dollars a year to not allow law enforcement to view your data without a court order signed by a judge, etc.

There have been so many articles speculating on the true value of Facebook shares. The truth of the matter is that the market sets the value - and it's just adjusting Facebook's, and other people's expectations at the moment. $13.80 is pretty good value for a share - it gives plenty of space for bumps upwards in the market (key sales, acquisitions and appointments).

The only way to go after an IPO like Facebook's is down. Look at the way the UK market contracted after Lastminute.com's IPO. These are more mature digital times, but there are still lessons to be taken from it.

Of course, this is all based on current information of revenue... but people don't pay for current business, they pay for potential of business (research), and FB seems to have some decent research.

Key fallacy in the argument: Revenue growth is compared to the average IPO.

If anything, Facebook is not the average company. It's not the average company that's gone public either.

That's not to say they won't have challenges growing revenue. I think that a company that's been around this long should've figured out how to mint money by now. But I think this analysis is wrong.

People have lost fortunes betting that things are under- or over-valued, screaming all the way down that "I'm riggghhhhhtttt!"

Because of the greater fool theory and the random walk theory I can not take any analysis seriously.

So if we apply industry standard valuation techniques, tested against an existing listed tech company Facebook is valued at $13.80. Why did everyone buy it at more than double the price? Ouch.

Basing a valuation on IPO statistics is not an industry standard valuation technique. For an industry standard valuation technique, check Damodaran's analysis made well before the IPO: (http://www.aswathdamodaran.blogspot.pt/2012/02/ipo-of-decade...)

His price was $28.

Remember, all Facebook has to do is figure out how to get each user to give it $100/year.

I was hoping $6.00

Now this is just silly. Stock prices are a bet. Sometimes they are more of a sure bet, sometimes they are more of a risk. But the idea that anyone can know exactly what a stock should be priced at for a company in a very dynamic field like facebook is just silly. It's better to point out that facebook's current valuation seems quite high and the risk of investing in facebook right now also seems quite high. But beyond that there are no certainties. Facebook could end up with a trillion dollars a year in net revenue in 10 years, or it could go end up sold to a 3rd party company for a tiny fraction of it's current market cap. We don't know and nobody can know.

You really think companies investing billions in things like Facebook are just throwing money at whatever they fancy and hoping it all works out? Investment banks employ thousands of people who do nothing but sit in their office and calculate if a certain security's price is off by fractions of a percent. Virtually everything that bank does is based on that analysis. They are very well-paid and a good market researcher is worth 100x his weight in gold-pressed latinum. They do fuck up, often publicly as it turns out, but that does not make their science any less refined.

A Random Walk Down Wall Street. Check it out.

Just because it involves math does not make it a science. That's absurd.

but that does not make their science any less refined

science? I wouldn't call it that...

Better hire some... Data Scientists!

Nonsense. It has nothing what so ever to do with science. All the analysis depends on rules that all the other players also know. If someone went in and changed some fundamental entry in their rule book (e.g. "testing from the bottom") the rules that the stocks themselves seem to follow would change overnight.

Facebook was pushing really, really hard for a higher IPO. Why? Why would the company WANT to sell off at 50, 100, or 150 price per earnings, higher and higher? This is setting unrealistic expectations and setting themselves up for failure. Does anyone know?

I have one theory: they need the money. Perhaps Facebook has some really audacious plans that it is confident in, and simply needs that many bilion dollars to do it (and even more).

From their execution on their audatious plans to date, this would be not be out of character, nor would I completely lack faith in their ability to do so. Any other ideas?

I mean, at the end of the day, wouldn't you rather have a billion in the bank after IPO-ing at 25 price per earnings and ending up fizzling, than have 3 billion in the bank after pushing really, really hard to IPO at 75 price per earnings and ending up fizzling? Personally, 1 billion is the same as 3 billion to me, but the latter scenario is not very pleasant, including plenty of possible lawsuits, etc. It's a lot easier to fault and deride a company in the latter scenario if it doesn't quite live up to expectations...

An IPO is firstly here to make money for the company. FB masterly made the maximum money they could, they sold as high as possible. It was a perfect IPO for FB. Nothing more.

I don't know. I'm pretty sure they wouldn't have wanted to raise $100billion. What would they do with it except buy back stock after a crash? Apple can't think of any use for their $100b in cash, and they're a hardware company with sprawling operations on three continent, and a capital-intensive retail division on four! (They're doing buybacks and dividends with their cash.)

By contrast, the amount FB actually raised, which is considerably less than that, they're acting like they need or have good use for.

This is just a theory, of course, and perhaps you are right that Facebook would have been HAPPY to raise a hundred billion dollars it has no use for. (Perhaps as part of stock dumping by big shareholders, who don't care what happens after this.) The above is just a guess. But I want to repeat my reason for it, which is that I have been extremely impressed by the expansiveness of Facebook's vision to date, and its execution on it. If they do have something big in mind, it's not unprecedented for them to be able to execute on it; I have some faith in their ability to do so, versus lots of other companies that suddenly realize they can think a lot bigger now that they have all this cash, but have no record of doing so. We'll find out if there's anything like this that Facebook has in mind soon enough...

From Facebook's perspective, they are at the end of a golden period where they are being judged by their potential rather than their results. That is a powerful thing, and probably the reason they overreached. Eventually, people will decide that 25x sales is insane, and they just won't be worth as much.

So the obvious answer is cash. More is better, and they only get one shot at being the unlimited golden boy.

But there are a couple limits to this reasoning. First, you can only use so much cash - Apple, for example, is having some issue with this. I don't think Facebook will have trouble deploying what they raised, though, so this isn't really an issue.

You also want to maintain a good working relationship with Wall St. What happens when Facebook tries to raise another round in the public markets?

And what about current employees? If they watch their shares decline by 50% before they can sell, it's bad for morale.

Edit: I forgot one other big problem: Acquisitions. Instagram, it was reported, was a largely stock deal (for example). Having to offer more stock or more cash in future acquisitions is a definite downer for Facebook.

(that doesn't work if the price goes back down though, so it can't be a good reason for Facebook to try it's hardest for a much, much higher IPO than bankers wanted.)

That's what I mean. Facebook doesn't want declining stock when they make stock based acquisitions.

Oh okay, didn't realize you meant it as "another limit to the reasoning". Makes sense. (Although if they know exactly how many acquisitions they plan, they can just sell at the all-time high price now, keeping the money for the acquisitions, instead of selling somewhat lower so that they can use stock with confidence built into it later. But, if they don't know this, and you would expect they wouldn't, then the latter strategy would have more merit). So, I agree with you if you meant this is another limit to wanting to sell as high as possible in the IPO, decline or no decline thereafter.

if fb finds a way to milk more cash through its service, people would go into a buying frenzy.. but that's a big IF.

I think this analysis ignores the marketing potential of facebook's user data. No one has even scratched the surface of targeted marketing with such data. An obvious thing to try would be to tailor the presenter of a product based on the personalities the user seems to defer to in facebook conversations. But I haven't bought any FB stock, I just think the analysis is facile and the real picture is much murkier.

Odd that a lot of people think that "No one has even scratched the surface of targeted marketing" for years and years on while no great improvements are made.

It looks more and more like natural intelligence in the 80's. Promised to be just around the corner, but never came.

No one has scratched the surface of what could be done with data like facebook's. The example I gave in the grandparent is something that just couldn't be tried in a meaningful way before.

>"I think this analysis ignores the marketing potential of facebook's user data."

How could the marketing of user data be "ignored" in the analysis? That's all FB is. Without looking at its ability to market user data, FB isn't even a business.

Not marketing of the data, marketing using the data.

I don't get the negativity towards FB that seems to be an undercurrent in these threads. This is Hacker News. If FB IPO'ed too high, that's good for the hackers. That means they got more money to build the business. If some investors lose a lot of money in the process, who cares?

Because when investors lose money, it makes it harder for the rest of the hackers to raise it the next time around.

Yes, because evil investors are not real people like us techies!

No, but investors have their own sites, their interests are not completely or even mostly aligned with those of techies, and it's silly for tech-focused sites to be preoccupied with their well being in a transaction that benefited a tech company at the expense of a bunch of institutional investors.

Can you expand on what you mean by they (hackers) "got more money"?

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