Quick answer - he does get equity at the next funding round. What he gets is the amount of equity that $150,000 would buy at that valuation. So if someone else invests $250,000 for 25%, that's a valuation of $1m. Yuri would get 15% at that valuation. He'd get 7.5% at a $2m valuation and so forth.
What happens if there is no next funding round (startup fails)? Do the startup founders have to return the debt?
"Startup fails" is the reason why these companies have the so-called "limited liability". They file for bankruptcy, founders get on with their lifes, investors see nothing. This is, in fact the vast majority of the cases, and the reason investing is called "high-risk, high reward".
I'd be interested to hear you elaborate on that. I keep hearing comparisons to the tech bubble (particularly around LinkedIn's IPO), but I'm having trouble seeing the parallels.
Everyone starting startups, joining startups, or wanting to do one of those. The majority of people working for peanuts, in hopes of future riches, spurred on by stories of a few people making it big, obscenely big . Businesses with vague business plans, and sales pitches full of jargon intermixed with good ideas but for the most boiling down to "we're on the internet!". Investors getting excited about an industry th…
All of this fueled by long nights pulled by young kids who's bodies can take the caffeine abuse for a while.
Don't doubt for a minute that some of us old farts are staying up late, downing obscene amounts of coffee, Red Bull, Monster drinks, etc., trying to get in on things. Hell, if anything, when you start getting older, and you look around and realize "I haven't done anything yet" a certain sense of, hmmm... I won't quite say desperation, but something like that, sets in. I've even spent a lot of time lately debating the merits of going ahead and ordering some black market "smart drugs" just to get a little extra edge. I haven't pulled the trigger yet, but it's awfully damn tempting.
The $150k offer reminds me of a rumor about the way in which Subway selected franchise locations back in the 1980's. Subway wouldn't do extensive market research or study traffic counts. Instead, they would see where there was a McDonalds franchise and then open a franchise in the same catchment area. At least that was the rumor (not to compare YC to McDonalds or Hamburger University).
I'd be interested to hear you elaborate on that. I keep hearing comparisons to the tech bubble (particularly around LinkedIn's IPO), but I'm having trouble seeing the parallels.
I think everyone can agree that it's booming, in much the same way that the housing market was booming. Tech is sexy again, and that's driving investment and throwing money into the ecosystem that otherwise wouldn't be there. That said, the only real test of bubbledom is whether the valuations are sustainable, and whether startups generate profit commensurate with the money being sunk into them. Google, Apple, and fa…
If those big companies continue to grow though there is no reason why they won't continue to make the acquisition's. For all the small acquisition's though your also generating new big companies that will be acquiring companies in the future.
A few years back there was no big social gaming company, now you have zynga cashed up and acquiring companies. Same thing could happen in the mobile space, a company that gets really big and then is able to acquire some of the many small new mobile development companies.
Can anyone explain the terms "no cap" and "no discount" in "$150,000 in convertible debt. With no cap and no discount."? I understand what a debt is, so how is "no cap and no discount debt" different from a regular debt? Also why would you as a startup would want to take a debt? Another question - what's the point of Yuri giving the debt, it seems he's not even asking for equity in return?
Quick answer - he does get equity at the next funding round. What he gets is the amount of equity that $150,000 would buy at that valuation. So if someone else invests $250,000 for 25%, that's a valuation of $1m. Yuri would get 15% at that valuation. He'd get 7.5% at a $2m valuation and so forth.
What happens if there is no exit or "liquidity event", but the startup is profitable and never takes additional funding? When does the $150K become equity?
I think everyone can agree that it's booming, in much the same way that the housing market was booming. Tech is sexy again, and that's driving investment and throwing money into the ecosystem that otherwise wouldn't be there. That said, the only real test of bubbledom is whether the valuations are sustainable, and whether startups generate profit commensurate with the money being sunk into them. Google, Apple, and fa…
If those big companies continue to grow though there is no reason why they won't continue to make the acquisition's. For all the small acquisition's though your also generating new big companies that will be acquiring companies in the future. A few years back there was no big social gaming company, now you have zynga cashed up and acquiring companies. Same thing could happen in the mobile space, a company that gets r…
I guess I could see Rovio go on an acquisition spree. Still, I think any market predicated upon acquisition rather than growth and profitability is inherently unstable. That instability allows for rapid growth, but it also allows for rapid and catastrophic failure, as we saw in the Banking industry.
Everyone starting startups, joining startups, or wanting to do one of those. The majority of people working for peanuts, in hopes of future riches, spurred on by stories of a few people making it big, obscenely big . Businesses with vague business plans, and sales pitches full of jargon intermixed with good ideas but for the most boiling down to "we're on the internet!". Investors getting excited about an industry th…
All of this fueled by long nights pulled by young kids who's bodies can take the caffeine abuse for a while. Don't doubt for a minute that some of us old farts are staying up late, downing obscene amounts of coffee, Red Bull, Monster drinks, etc., trying to get in on things. Hell, if anything, when you start getting older, and you look around and realize "I haven't done anything yet" a certain sense of, hmmm... I won…
Better to fuel your mind with the right foods, supplements, etc. B-complex, good quality sea salt, the right fats -- all good for the brain. And it isn't followed by a crash because it builds capacity rather than squeezing existing resources to get more out of them.
The $150k offer reminds me of a rumor about the way in which Subway selected franchise locations back in the 1980's. Subway wouldn't do extensive market research or study traffic counts. Instead, they would see where there was a McDonalds franchise and then open a franchise in the same catchment area. At least that was the rumor (not to compare YC to McDonalds or Hamburger University).
Can anyone explain the terms "no cap" and "no discount" in "$150,000 in convertible debt. With no cap and no discount."? I understand what a debt is, so how is "no cap and no discount debt" different from a regular debt? Also why would you as a startup would want to take a debt? Another question - what's the point of Yuri giving the debt, it seems he's not even asking for equity in return?
When offering convertible debt, the investor accepts the valuation at the next round of investments (in this case series A). The risk for the convertible debt investor is that this valuation will be very high and the series A can take a long time. To limit this risk convertible debt investors negotiate valuation caps and discounts. Cap: The convertible debt gets converted at min=[series A valuation, cap]. Discount: T…
Can somebody give me an advice. We have a two person startup, that is making about 20k/mo and it's growing. I am the founder. The thing is, I do not currently plan to raise VC money. My goal is to achieve revenue of 200k/mo by 2013. It is very realistic, but the problem is that as the service grows, we spend more and more time on operations, since certain things were not timely automated. We need about 300k , so that we can hire a couple of contractors to automate operations, to accelerate product development.
But since I do not plan to raise a VC round, the convertible loan would not work. What is the right mechanism for this investment? I also believe the risk is lower than normal, since we have been making money for a while, and this should be reflected in the terms and in the valuation. Is this the domain of angels to make such an investment?