* PG makes big talk about winner's average returns... Yayyyyy..... However YC gets preferential shares; YC is not aligned with the common shareholders (founders; builders). YC builds a story that they support creators however YC doesn't sit on the same table-side as creators.
* I actually believe YC is worthwhile, but I wonder if Ize just been brainwashed?
> For most companies, pre-seed SAFEs don't end up much above common.
I'm not sure that is correct.
AFAIK the modern YCombinator post-money SAFE [1] converts to the exact same share class as the VC investment round. The bookface document[2] says "when the company decides to sell shares of preferred stock in a priced round (an 'Equity Financing'), the outstanding safes will convert into shares of preferred stock" and also says elsewhere "then the safe holder will receive shares of Standard Preferred Stock".
I know nothing - so could be completely wrong!!! Complicated stuff LOL
It's not that YC specifically gets "preferred shares" -- it's that investors in general insist on liquidation preferences when buying non-liquid shares in unproven private companies.
How would an alternative scenario of investors buying common shares of illiquid stock in a private company actually be realistic? Maybe the startup founders could hypothetically insist on selling only common shares and never preferred shares as a condition of investment?!? But what investors (other than family relatives) would put in money in that case?
Or put another way, let's say we create a brand new VC fund to invest in startups and one of the novel concepts is that the fund only buys common shares to be more "founder friendly". The problem is that hypothetical VC fund will attract no rational limited partners with money because they know that startup founders can just take their invested dollars with no payback protection. Such a VC fund with no investors and no money to invest would be a moot point. The general partner of such a VC fund would be considered a "financial idiot" for buying common shares in startups.
In the end, the "preferred shares" is the market's "risk premium" that investors charge as an offsetting factor for losing 100% of their money. If startup founders can't find a way to convince investors to accept illiquid common stock instead of preferred shares, they need to avoid investors altogether and self-fund via bootstrapping.
For what it’s worth, which isn’t much, I see signs this precept is changing because of the huge amounts of investible capital fighting for opportunities as the thaw progresses. It’s not going to be a widespread change, though, most will stick with what they’ve known.
The level of risk is irrelevant. What matters in access to capital is negotiating power. This isn't a charity. If employees want lower risk then they can go work somewhere else.
He didn’t claim YC does this where others don’t, his gripe is with the narrative YC pushes and how they seem incongruent to how they currently operate.
preferred shares prevent cookie cutter founder fraud. Founder raises $1M at 10 post. Founder decides to sell 6 months later for 2 mil. Investors get 200k back founder gets 1.8 mil. Now run this math for AI unicorns.
different share classes trade at different prices. Employee NSO/ISO strike price at seed stage (i.e. on a SAFE) are typically priced at a FMV of 10% (!!) of the SAFE's postmoney valuation. Also, your use here of the word "fair" has triggered a personal tick of mine so I must direct you to https://quotefancy.com/quote/3709551/Chris-Voss-The-F-word-F...
Why would investors care whether a particular capital structure is "fair" to employees? As long as the company is able to recruit and retain qualified employees, any fairness or lack thereof is entirely irrelevant.
But as a potential employee interviewing for a new job, if you're being offered equity compensation then you might want to inquire about share classes and liquidation preferences. It could be a factor in your decision if you have multiple options.
Or to make it even more obvious: Founder raises $1MM then immediately sells the company for $900k :)
Some terms are going to need to exist to prevent that, so the investor shares will always be preferred. Beyond that there are in fact a lot of other terms that are in some deals but not others (2x preference, pro rata, etc..)
> The problem is that hypothetical VC fund will attract no rational limited partners with money because they know that startup founders can just take their invested dollars with no payback protection.
YC famously claims it is not a VC fund because it invests their own money, they wouldn’t have this problem.
>YC famously claims it is not a VC fund because it invests their own money,
Th label "VC fund" can be imprecise because YC itself has changed its structure over the years.
The original 2005 YCombinator where Paul Graham & Friends used some of their personal Yahoo wealth from selling ViaWeb ... instead of raising outside money from "limited partners" ... was the period when they were more like "angel investors".
But YC still doesn't do all the typical "vc fund" procedures such as take a board seat or negotiate a different % with each startup founder on a case-by-case basis. The VC funds like Sequoia/a16z/etc will require a board seat and negotiate different ownership percentages.
So today's YC is a "semi" VC fund depending which aspects are salient to you.
Welcome to capitalism. Of course there is an asymmetry between individual founders and one of the, if not the most famous VC firm on the planet. It's an individual decision to determine whether YC is worthwhile. If it wouldn't be, it wouldn't work.
Silicon Valley is not capitalism, it's financier-ism. It isn't about finding a gap in the market and providing a profitable service, but bandwagoning behind the latest trends so as to chase "scalability" and later using financial/political muscle to weaken regulations so as to better "disrupt" the market. Profits? That's a problem for whoever they manage to dump their shares on.
What do you think capitalism is, if not that? "Those with capital use their money to make the rules so they make more money."
Many people think capitalism is simply a market economy. It's not. You can have a market economy without "capital" (investors) having special privileges that make all the money flow to them.
The quality bar for YC has been at an all time low. Hence why lots of “startups” are getting accepted into YC in 2024 screaming about AI and some that compete against each other over the same idea, but “open source”.
> I actually believe YC is worthwhile, but I wonder if Ize just been brainwashed?
Ask yourself, if you really need VC money in the first place.
The moment you go to YC, they become your new boss and always win and you get to laugh at all of us HNers in this secret club called bookface [0]. (Yes, that hidden version of HN and part of YC)
Very unlikely to change anytime soon, but the SVB collapse should have taught us something.
The quality bar of pretty much all seed stage investors has always been extremely low. That is simply the nature of the business. At that stage the signal-to-noise ratio is very low. There just isn't enough data to make reliable determinations, hence the emphasis on quantity of deals over quality.
There is nothing to learn from the SVB collapse. They mismanaged interest rate risk and overextended. So what.
> The quality bar of pretty much all seed stage investors has always been extremely low. That is simply the nature of the business.
Of course it is. That is why I said the quality bar it is at an "all time low".
> There is nothing to learn from the SVB collapse. They mismanaged interest rate risk and overextended. So what.
Ah yes, why not tell those same so-called "AI startups" to repeat that same mistakes again in 2023 and also continue to burn lots of that money and we'll see yet again widespread massive panic, downrounds on this site like we did before.
The startups that got complacent over believing that VCs will just throw money into their startup forever (until they don't) are the ones that will be added into that inactive directory unfortunately.
So as soon as this AI bubble collapses with a new surprise catalyst, I won't be surprised to see YC directly caught in the contagion because they threw themselves into hundreds of low-quality startups, unable to make money and they are cloned and raced to zero.
* The modal win for a founder is $0.00
* PG makes big talk about winner's average returns... Yayyyyy..... However YC gets preferential shares; YC is not aligned with the common shareholders (founders; builders). YC builds a story that they support creators however YC doesn't sit on the same table-side as creators.
* I actually believe YC is worthwhile, but I wonder if Ize just been brainwashed?
(reëdited for clarity)