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It happens. There are investors who are notorious for offering lower caps to startups that have already started raising money. The solution is essentially to route around them. We advise startups to approach such investors last, when they've already raised enough that they feel comfortable saying "take it or leave it."

(There was a big kerfuffle a while ago when an email of this type got leaked.)

There's another case, though, when the startup has initially raised money at a higher cap than the market will bear. We warn founders about this, but they don't always listen. In that case they give the earlier investors the same lower cap that they negotiate with later investors.

This seems very inefficient for the startup. They have people willing to offer more money for less shares, so why not go down the list until they have enough money? Or are there second-order effects I am not seeing here.

It may not necessarily be inefficient. YC has an established brand. Initial YC investors know they will get the best possible terms, so they would be wise to offer the max value. The start-up it could take this "max" valuation to all future investors.

The alternative would be a low initial offer which would essentially keep anyone else from paying more. In essence the YC start-ups are giving the initial investor a money back guarantee on the difference between their offer and the lowest offer.

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