Lately, there have been a lot of discussions about whether Y Combinator is worth it and what the SAFE leaves founders with. I crunched some numbers to model different scenarios and different start-up valuations to compare whether the YC's deal is any good and what the other options are. In general, thinking about the 7% of the Y Combinator's SAFE and whether it's worth it is the wrong mental model to start with. It’s like announcing winners and losers in a race immediately after the start and before anybody even runs half a distance. The thing is the 7% Safe is just Step 1 in the priced Seed round when YC’s shares convert-and there are 2 more steps that depend on the round valuation. It’s not worth thinking about how big or small a share Y Combinator gets since there is also the mandatory stock option pool and a new VC's share. The main number to compare that’s important for founders is how big a share they are left with after the priced round is done. Anyway, I modeled 3 scenarios (1: YC's Safe + VC Seed, 2: VC Seed Only, 3: VC Pre-Seed + Seed) with 6 different start-up valuations ($5M, $7M, $10M, $15M, $20M, and $25M) of the Seed round for each scenario to compare founders' share as a result. Here is the detailed post for those interested in numbers: medium.com/p/f5d1befc4b58 P.S. A caveat about Y Combinator’s Safe instrument It’s important to stress that the YC’s deal is only good as long as a priced round follows it. Due to its structure, the Safe is very aggressive in anti-dilution protection. It is the post-money Safe. In other words, it offsets to founders any possible dilution by any additional Safes or convertible instruments issued after the Y Combinator’s investment and before a priced round. While follow-on financing should dilute previous financing shares, YC’s Safe converts after all the Safes and convertible instruments that followed it have converted in conjunction with the priced round. So, the follow-on financing dilutes founders only - not Y Combinator - even if YC’s financing happened earlier. If you participate in the Y Combinator’s program, make sure the following financing is a priced round.
Lately, there have been a lot of discussions about whether Y Combinator is worth it and what the SAFE leaves founders with. I crunched some numbers to model different scenarios and different start-up valuations to compare whether the YC's deal is any good and what the other options are.
In general, thinking about the 7% of the Y Combinator's SAFE and whether it's worth it is the wrong mental model to start with. It’s like announcing winners and losers in a race immediately after the start and before anybody even runs half a distance. The thing is the 7% Safe is just Step 1 in the priced Seed round when YC’s shares convert-and there are 2 more steps that depend on the round valuation.
It’s not worth thinking about how big or small a share Y Combinator gets since there is also the mandatory stock option pool and a new VC's share. The main number to compare that’s important for founders is how big a share they are left with after the priced round is done.
Anyway, I modeled 3 scenarios (1: YC's Safe + VC Seed, 2: VC Seed Only, 3: VC Pre-Seed + Seed) with 6 different start-up valuations ($5M, $7M, $10M, $15M, $20M, and $25M) of the Seed round for each scenario to compare founders' share as a result.
Here is the detailed post for those interested in numbers: medium.com/p/f5d1befc4b58
P.S. A caveat about Y Combinator’s Safe instrument
It’s important to stress that the YC’s deal is only good as long as a priced round follows it. Due to its structure, the Safe is very aggressive in anti-dilution protection. It is the post-money Safe. In other words, it offsets to founders any possible dilution by any additional Safes or convertible instruments issued after the Y Combinator’s investment and before a priced round. While follow-on financing should dilute previous financing shares, YC’s Safe converts after all the Safes and convertible instruments that followed it have converted in conjunction with the priced round. So, the follow-on financing dilutes founders only - not Y Combinator - even if YC’s financing happened earlier. If you participate in the Y Combinator’s program, make sure the following financing is a priced round.
Finally, somebody explained this with pizza!!! Thanks a lot!!!
right!? it was long overdue!