Y Combinator is NOT a great deal for founders

@andrewchanvc

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Y Combinator

Why it worked

The video addresses a common question founders have about startup funding and incubators, providing a critical perspective on a well-known entity (Y Combinator) which sparks curiosity and engagement.

Summary

The video argues that Y Combinator is not always a great deal for founders due to the equity dilution involved. While YC offers a standard deal of 7% for $125k, subsequent rounds can lead to significant dilution, especially if the company doesn't raise at a high valuation. The speaker suggests that other accelerators might offer better terms and that sometimes a direct VC process can be more beneficial for founders.

Structure

1YC's standard deal and dilution
2The impact of subsequent funding rounds
3Comparison with other accelerators
4The importance of founder equity

Product placement

The video discusses Y Combinator as a subject, analyzing its investment terms and their impact on founders.

On-screen text

Y Combinator is NOT a great deal for founders 7 percent for how much money?

Original caption

Replying to @stevenmusielski should probably make a separate video explaining most favored nations in more depth as that’s actually very important but this is something you should understand as a founder of a startup, accelerators and incubators are VERY expensive so if you’re doing one go in eyes open #ycombinator #venturecapital #startupfounder

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Transcript

It is not a very good deal to do Y Combinator. When YC invests in your startup, you give up 7% instantly for 125 thousand dollar investment. And you also take 375 thousand dollars at most favored nations terms. That just means it will convert to whatever the price of the final round ends up coming in at. Usually nowadays YC safes are at 30 million on the actual round. Means you'll take another extra 1% dilution for you as a founder. What that means is that you're effectively 500 thousand and a six million dollar valuation, which for most precedes is actually pretty low. It's on the lower end of valuations. Now the benefit for your accommodator, you're gonna go and you're gonna raise that round to the 30 million dollar valuation. And what really matters? Cause you just skip the pre-seed, went straight to seed and you're not taking that much extra dilution at the seed. But not every company that comes out of YC ends up being able to raise right at demo date. Not every company is going to be able to raise at a 30 million dollar valuation. Maybe raising a 15. And suddenly you've given up 30% of your business for not that much value. Other incubators and accelerators are starting to try to compete with this by offering much better terms like I think HFO right now is 1 million at 20 is their standard deal. But for you as a founder, if you're going to go down the YC route, you should be really sure that that's actually going to be value accrued up to your business. Because it is a lot of dilution. And many times it'll be better to just go through an actual VC process. And maybe you're not raising a 30 and you're not gonna have the YC name associated, but you'll actually have better equity splits and better learning along the way.