Sam Altman: ‘Too many’ Y Combinator companies raise money

Edge cases:

A. If you give the equity to the startups:

1. There is a risk of activist or corporate acquirers getting a substantial share of YC after buying out startups. Contract clauses can eliminate that, and prevent dilution, but value of extended network advocacy is lost too.

2. Do dead startups lose their share? If they do, you would see more zombies, which is not ideal. If they don’t who keeps the equity when founders part ways? If it’s the founders based on equity share - see (B)

3. Competing startups could have shares in the successful one, and potential vote, which leads Oracle/Salesforce type battles. Potential swinging votes during corporate governance, but also potential helpful behavior, which while nice could be seen collusion by regulators at scale. That said, startups win with monopoly characteristics, so that may be less of an issue.

B. If you give the equity to individual members:

1. There is selection bias where alumnae help friends and go through the program multiple times - you risk having portfolio maximization and groups voting buddies in for control over YC. Even if you don’t see clique battles, there will still be: Vote these guys in because they were Stanford alumns too. Over time you will lose even more diversity in the network and a broader network that captures the next wave of breakouts not seen by the less diverse YC will gain speed.

2. The resume stuffing and portfolio padding motif to join YC will be dominant to the “let’s build a unicorn” motif. People who pursue status and do YC as the next Harvard will have more easy access (B1) and more reason to go for it.

3. To boost the unicorn incentive the above equity distribution needs to continue only if you have a startup within YC that is actively growing by certain criteria or has had a meaningful exit for the YC network. Another way to protect integrity of the network, is to allow equity in YC to be stacked only if the person has been a founder of more than one startup still growing or with a meaningful exit. This scenario may be enhanced with some incentive for people who join other YC startups meaningfully, but how complicated a structure will be too complicated for investors in the YC startups themselves?

This is first layer of brainstorming with minimal info.

> Basically in joining YC, each YC member would be granted a percentage of YC's 7% stake in all of the YC companies which would reduce their need to fundraise.

I was curious what this could mean in reality so I did some back of the envelope math. (As a disclaimer - I have no inside knowledge of the performance of YC's portfolio, so all this math could be wrong.) YC Summer '17 had 294 founders at 124 startups. Let's say there is an Airbnb ($30 billion to common at liquidity) and three smaller but still substantial exits ($1 billion, $500 million and $250 million respectively, same terms). The rest of the class is a wash after expenses and fees which leaves $31,750,000,000 to split up. On a side note, every time I do this math I'm reminded how the ten figure exits really carry the rest of the valley along for the ride; whether there is one in your class or not is a roll of the dice.

YC keeps 4% for themselves (out of which they generally fund expenses and management fees) and puts 3% (with no carry) into the common class pool, divided equally by startup (not founder, to avoid perverse incentives around cramming). In other words, the YC Summer '17 class collectively owns 3% of every member company. After ten years the 3% has been diluted down by follow on rounds to 1.5%. At liquidity, the fund returns 1.5% of $31.175 billion: $467,625,000. Divided among 294 founders equally (which it wouldn't be, as mentioned above - but for easy math) that's about $1.5 million per founder.

If you miss the class with an Airbnb, Uber, or Snapchat and end up with (merely) a few traditional unicorns, the returns decline 90% to a couple hundred thousand dollars per founder, a.k.a. not that exciting financially. So it seems like a gamble.

Still, I like the spirit of the whole idea. As a lifelong entrepreneur who hasn't quite pulled the trigger on applying to YC this might push me over the edge. It would definitely feel like being part of a grander experiment of some kind.

The irony of the game is that having money in the bank let you hire great people and pivot to the right idea, but to raise money you need great people and the right idea. So, MAYBE, it's not that bad of a thing to raise even if you don't have everything figured out yet.

If you know you are a likely to get between $100k and $1m in ten years, then there is a lot less financial risk of not putting any money in a 401k for a few years when creating a startup that eventually fails. I think this is a really cool idea. It would also will bind the group together even more (if you think that is a good thing).

I love the ambition of this dude to call out the valley to reach for more than what it is. The field needs 10000 more Sam Altmans.