Applying to YC as a non-DE company does not reduce your chances of being interviewed or accepted. However for us to be able to invest in so many companies in such a short time frame, we do require you to convert to a DE C-Corp if we agree to fund you. I'll help you with that though, if the time comes!
Incorporating in Delaware is standard practice for any US corporation. Not only are there tax and legal advantages, but since everyone else incorporates in Delaware, Delaware case law is extraordinarily mature, so legal risks are minimized. It may seem dishonest to the uninitiated, but the people who specialize in such things are well aware of Delaware.
Companies can incorporate wherever works for them ie Delaware. If they are actually doing business in CA then they register as a foreign entity with CA (Foreign because they incorporated in DE) so there is nothing dishonest about it.