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New Standard Deal

blog.ycombinator.com

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Re: New Standard Deal

#61

Post by sethbannon »

jasonkwon wrote: post #55
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…

It's clear you put time and thought into this post, so it deserves an equivalent amount in response. I think you’ve understood some things correctly, but not others, but that’s why we're on HN - to help clarify. (1) The modeling you’ve done for the premoney safes is correct, but it’s incorrect for the postmoney scenario. That’s because Angelcalc hasn’t been updated yet for postmoney safes that track the one we releas…

Thanks Jason for the thoughtful reply, and thanks also for your work on simplifying and improving the YC SAFE. I think these improvements will benefit the entire ecosystem (founders & investors & employees) by making it easier for everyone to understand SAFE dilution.

Still not clear on how (in most cases and assuming there is not a 0% option pool pre-equity round) this will not lead to increased expected dilution for founders from the YC deal as compared to the old deal, so would love to play around with your Excel sheet. My email is my HN username at gmail.

Re: New Standard Deal

#62

Post by jasonkwon »

stephenhuey wrote: post #36
jasode wrote: post #32

Earlier quoted context omitted.

One of your favorited links is "Holloway Guide Equity Compensation"[1] and it has a section of typical percentages. It also mentions some higher percentages for employees which are not typical. As for "fairness", it's going to ultimately be in the eye of the beholder. You could give employee #12 a 5% stake (which is CEO level at other startups) and yet that employee still feels it's "unfair" even it's explained that…

Thanks for reminding me! I've thought about this a lot from time to time, and I realize I forgot to mention something else besides just the equity distribution. I've heard plenty of stories of nasty ways companies wrangle hard-earned equity out of employees. I think it'd be great for YC or someone of similar stature to encourage companies to use very standard terms to avoid a lot of the unkind ways employees get scre…

re: short windows for exercising options:

https://triplebyte.com/blog/fixing-the-inequity-of-startup-e...

https://blog.samaltman.com/employee-equity

https://news.ycombinator.com/item?id=11198991

https://a16z.com/2016/07/26/options-plan/

https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sens...

Re: New Standard Deal

#63

Post by jasonkwon »

sethbannon wrote: post #61
jasonkwon wrote: post #55

Earlier quoted context omitted.

It's clear you put time and thought into this post, so it deserves an equivalent amount in response. I think you’ve understood some things correctly, but not others, but that’s why we're on HN - to help clarify. (1) The modeling you’ve done for the premoney safes is correct, but it’s incorrect for the postmoney scenario. That’s because Angelcalc hasn’t been updated yet for postmoney safes that track the one we releas…

Thanks Jason for the thoughtful reply, and thanks also for your work on simplifying and improving the YC SAFE. I think these improvements will benefit the entire ecosystem (founders & investors & employees) by making it easier for everyone to understand SAFE dilution. Still not clear on how (in most cases and assuming there is not a 0% option pool pre-equity round) this will not lead to increased expected dilution fo…

Sure - just sent to you.

Re: New Standard Deal

#64

Post by neom »

sethbannon wrote: post #53
mwseibel wrote: post #48

Earlier quoted context omitted.

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 understandi…

Generally a huge fan of the way you're simplifying things here, just pointing out that this change makes YC more expensive for founders from an equity standpoint. It's true that founders could compensate for this by raising SAFEs from other investors at a higher valuation, but that is likely to make those raises a little more difficult, so there is some downside.

This will almost certainly make it harder for founders to raise money, but we found it wasn't that difficult to explain that time has passed so things need to change a little in the cap as we roll forward.

Re: New Standard Deal

#65

Post by sroussey »

sethbannon wrote: post #61
jasonkwon wrote: post #55

Earlier quoted context omitted.

It's clear you put time and thought into this post, so it deserves an equivalent amount in response. I think you’ve understood some things correctly, but not others, but that’s why we're on HN - to help clarify. (1) The modeling you’ve done for the premoney safes is correct, but it’s incorrect for the postmoney scenario. That’s because Angelcalc hasn’t been updated yet for postmoney safes that track the one we releas…

Thanks Jason for the thoughtful reply, and thanks also for your work on simplifying and improving the YC SAFE. I think these improvements will benefit the entire ecosystem (founders & investors & employees) by making it easier for everyone to understand SAFE dilution. Still not clear on how (in most cases and assuming there is not a 0% option pool pre-equity round) this will not lead to increased expected dilution fo…

I think they expect to get a better deal but that it will be offset by demo day investors.

Re: New Standard Deal

#66

Post by sethbannon »

jasonkwon wrote: post #63
sethbannon wrote: post #61

Earlier quoted context omitted.

Thanks Jason for the thoughtful reply, and thanks also for your work on simplifying and improving the YC SAFE. I think these improvements will benefit the entire ecosystem (founders & investors & employees) by making it easier for everyone to understand SAFE dilution. Still not clear on how (in most cases and assuming there is not a 0% option pool pre-equity round) this will not lead to increased expected dilution fo…

Sure - just sent to you.

Played with your excel and while the difference is not the same as I calculated with AngelCalc, it still seems the dilution from this new YC deal will be greater than the old YC deal post-equity round in basically every circumstance.

Essentially, with this new deal, after equity financing YC will own 7% minus the dilution from the equity round minus dilution from any options pool increase [1]. Previously, after equity financing, YC would own 7% minus the dilution from the equity round minus the dilution from the SAFE round.

While it's true founders are getting a little bump on YC absorbing the dilution from a Series A option pool re-up, in my experience these are typically 5% to maximum 15% increases. Whereas the dilution from post-YC SAFE rounds are typically 15% to maximum 30%. So YC is assuming a potential 5-15% dilution in their ownership while avoiding a 15-30% dilution in their ownership. Translation: YC will own more post-equity financing than they would in the old deal.

This puts a burden on the founders to make up for that increased dilution by raising the post-YC SAFEs at a higher valuation than they otherwise would, which will likely make those raises harder. Alternatively, they can raise their Series A at a higher valuation than they otherwise would to make up for YC's extra ownership, but that will make those raises harder than they otherwise would be. So there is a real dilution downside for founders here.

1: in reality YC will continue to own 7% after the equity round because they'll exercise their pro-rata right during the equity round but that doesn't change the underlying point being made here so will ignore it for simplicity.

Re: New Standard Deal

#67

Post by sroussey »

jasode wrote: post #32
stephenhuey wrote: post #30

I'd love to see YC or someone release a definitive recommendation on fair equity distribution among the employees of the company. Maybe there'd be a few variations on it to handle differing scenarios, and even if it's really hard to have a one-size-fits-all I think it'd be similar to their SAFE note which tries to offer a pretty good deal to all involved.

One of your favorited links is "Holloway Guide Equity Compensation"[1] and it has a section of typical percentages. It also mentions some higher percentages for employees which are not typical. As for "fairness", it's going to ultimately be in the eye of the beholder. You could give employee #12 a 5% stake (which is CEO level at other startups) and yet that employee still feels it's "unfair" even it's explained that…

It’s also interesting that almost no one mentions % of what — the whole company or of the current option pool.

Re: New Standard Deal

#68

Post by tptacek »

JumpCrisscross wrote: post #43
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.

That seems certainly to be true of YC, but I'm less certain about VC in general. YC aside, the major benefit of VC money is that it can make getting more VC money easier, since it's bundled with social proof.

Re: New Standard Deal

#69

Post by tptacek »

aassddffasdf wrote: post #39

So $150,000 is enough runway for what: 0.6 man-years? Sounds legit.

The idea isn't that you go for years on the YC 150k. For most YC startups, the idea is that the social proof of getting through YC buys you access to the market for syndicated convertible debt rounds, which, while talked about extensively on HN, are not all that easy for first-time founders to access without YC's help.

So really, YC is giving you some money to get through demo day, at which point you'll raise real "runway" money from seed funders.

There's a cohort of YC founders that only do YC (or, at least, rely on YC's money for a long time before raising further); those companies get to break-even cash flow quickly and often aren't (or aren't yet) on the "shoot the moon" trajectory VCs are looking for. But those companies aren't made or broken by YC's decision to "fund" them.

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