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New Standard Deal

blog.ycombinator.com

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Re: New Standard Deal

#41

Post by sethbannon »

Great that YC is simplifying their deal and making it more standard and easier for founders to understand. Also great that they're switching the standard SAFE to be a post-money SAFE, as this will eliminate a lot of confusion around dilution that resulted from the complicated math of the old standard SAFE.

Interestingly, unless I'm understanding this incorrectly, this change might mean a worse deal for founders going through YC. As the post mentions, when calculating the dilution taken from a post-money SAFE, all other money raised on convertible instruments before an equity raise are excluded.

Functionally, what this means is that while investors on standard SAFEs are diluted by other SAFE investors before an equity round (as are all common holders), investors on post-money SAFEs are not diluted by other investors on SAFEs before an equity round.

So unless I'm misunderstanding this, I believe this means that YC (which was previously a common holder like the founders) will no longer be diluted by the money founders raise on convertible notes or SAFEs before an equity round, whereas before they were diluted by that money.

To demonstrate this, I modeled out a scenario where a company goes through YC, raises $2m on a $10m cap pre-money SAFE after demo day, and then raises a $10m Series A equity round at a $30m pre-money valuation. Scenario A shows the old YC deal where YC has 7% common, and Scenario B shows the new YC deal where YC invests on a post-money SAFE

Scenario A: http://angelcalc.com/model?mod=802&dispShare=0e55666a4ad822e...

Scenario B: http://angelcalc.com/model?mod=803&dispShare=8a50bae297807da...

Note: click "Model" to see the results. In Scenario A, YC is listed as "YC" and in Scenario B YC is listed as "Post SAFE-0 (2.1mm)". As you can see YC ends up with 1.575% more equity in Scenario B.

The simplicity of this change is great but it's important that founders understand the downside as well. Team YC, if I'm misunderstanding this, please let me know.

Re: New Standard Deal

#42

Post by simonebrunozzi »

daniel_levine wrote: post #38
xmly wrote: post #31

Standard deal does not have a discount?

no need for a discount if there's a cap. Discount is nice if you don't want to try and set a cap/price, but if you're OK setting a cap then it effectively grants a discount

Incorrect. A cap means that above the cap, no discount matters. Below the cap, however, the discount is applied.

Example: raising 1M at 10M cap, 20% discount.

Scenario 1: next priced round at number below 10M - the cap doesn't apply, the discount does.

Scenario 2: next priced round at number between 10M and 12M - the cap doesn't apply, the discount does.

Scenario 3: next priced round at more than 12M - cap applies, discount doesn't.

In short, either cap OR discount are applied, whatever is the most beneficial to the investor.

Re: New Standard Deal

#43

Post by JumpCrisscross »

Animats wrote: post #40

That's friends and family size money. Why get a VC at that scale?

> Why get a VC at that scale?

A dollar of VC is generally worth, ceteris paribus, more than a dollar of friends & family money. The coaching, connections, reputation boost when talking to other investors, sales prospects, potential employees, the media, et cetera are meaningful.

Re: New Standard Deal

#45

Post by mpenn »

Overall, simplifying how to understand one's cap table is great. It gets in the way of many founders understanding their business in really pernicious ways.

I do believe this will change the dynamic for YC founders dramatically 1 - 3 years out if not ready for a Series A (equity round) but need more capital (seed extension). I know many people who raised $500K - $3mm more on SAFEs. Because they were pre-money, the dilution for stacking SAFEs worked. Now, that will be much harder. The next round of financing will need to be an equity round to convert SAFEs to equity. I don't know if this is good or bad, but it will push people very heavily towards an equity round if they need any more funding.

Re: New Standard Deal

#46

Post by mwseibel »

mpenn wrote: post #45

Overall, simplifying how to understand one's cap table is great. It gets in the way of many founders understanding their business in really pernicious ways. I do believe this will change the dynamic for YC founders dramatically 1 - 3 years out if not ready for a Series A (equity round) but need more capital (seed extension). I know many people who raised $500K - $3mm more on SAFEs. Because they were pre-money, the di…

It would still be very easy to raise a bridge round on SAFEs at a higher cap (or the same cap). Not sure why there would be a push to equity round. Even better, you'll know your dilution after the bridge round which will better allow you to plan for the A.

Re: New Standard Deal

#47

Post by [deleted] »

simonebrunozzi wrote: post #42
daniel_levine wrote: post #38

Earlier quoted context omitted.

no need for a discount if there's a cap. Discount is nice if you don't want to try and set a cap/price, but if you're OK setting a cap then it effectively grants a discount

Incorrect. A cap means that above the cap, no discount matters. Below the cap, however, the discount is applied. Example: raising 1M at 10M cap, 20% discount. Scenario 1: next priced round at number below 10M - the cap doesn't apply, the discount does. Scenario 2: next priced round at number between 10M and 12M - the cap doesn't apply, the discount does. Scenario 3: next priced round at more than 12M - cap applies, d…

[deleted]

Re: New Standard Deal

#48

Post by mwseibel »

sethbannon wrote: post #41

Great that YC is simplifying their deal and making it more standard and easier for founders to understand. Also great that they're switching the standard SAFE to be a post-money SAFE, as this will eliminate a lot of confusion around dilution that resulted from the complicated math of the old standard SAFE. Interestingly, unless I'm understanding this incorrectly, this change might mean a worse deal for founders going…

On one hand pre-money SAFEs diluting pre-money SAFEs is helpful to founders. On the other hand it makes it impossible to calculate dilution. As a result, a large number of companies are raising money without understanding their ownership. Once they get to Series A they get a rude awakening when they end up owning less than 50% of their company. By moving to post-money SAFEs every founder will have a clear understanding of their cap table which will allow them to better plan for future funding rounds. The negative effect that you describe can easily be accounted for by slightly increasing the cap at which you raise the SAFE. Needless to say, we are both trying to accomplish the same goal: founders raising money at financial terms that won't result in over-dilution.

Re: New Standard Deal

#50

Post by adamzerner »

snowmaker wrote: post #34
adamzerner wrote: post #29

> But startup costs have undeniably increased over the past few years. We thought a $30K increase was necessary to help companies stay focused on building their product without worrying about fundraising too soon. I didn't realize that this was true. I'm interested in hearing more about what has caused the increase in startup costs.

Primarily cost of living increases for the founders. Things like hosting and other services have gone down.

Ah, that makes sense. Thanks.
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