By Kirsty Nathoo
YC’s Standard Deal
We have a standard deal for every company that is accepted to Y Combinator. We invest $500,000, and our investment gives YC 7% of your company plus an incremental equity amount that will be fixed when you raise money from other investors.
The YC investment is not contingent on hitting any milestones, and we do not wait until the batch program starts to invest. The day a company is accepted to YC, we commit to investing our standard deal and begin the process to do so immediately.
In addition to the YC investment, YC companies receive access to a wide range of resources. Here is a full list of the benefits and resources available to YC founders.
The Math
The way it works is this: we invest $500,000. $125,000 of our investment converts into a fixed 7%, and the other $375,000 is invested on an uncapped MFN safe.
If you’re not familiar with uncapped MFN safes, here’s a quick example. In a typical scenario where you raise your next safes at a $15M post-money valuation cap, the $375,000 MFN safe would convert into $375,000 / $15,000,000 = 2.5% of the company.
YC also gets a right to continue to invest in subsequent rounds of financing you raise (a “pro rata” right). In many cases we have invested millions of dollars in companies by continuing to support them in later rounds.
Finally, it’s sometimes hard to compare offers from different accelerators. Importantly, we don’t charge any fees to the companies to be part of YC. We understand the complex reasons that cause some accelerators to charge fees to the companies that participate in their programs, and while we don’t think it’s bad behavior, obviously founders should deduct those fees from the investment when they’re thinking about those offers. We also try hard to avoid any “gotcha” terms like enhanced returns in downside exit scenarios and similar provisions.
Details of the investment
This section sets out the details and mechanics of YC’s investment, for those who are interested.
Our $500K investment is made on 2 separate safes at the same time, with an accompanying YC Agreement:
We invest $125,000 on a post-money safe in return for 7% of your company (the “$125k safe”)
We invest $375,000 on an uncapped safe with a Most Favored Nation (“MFN”) provision (the “MFN safe”)
The YC Agreement sets out some YC-specific guidelines and rights, including a participation right to invest in the company’s future financing rounds.
In this Safe Conversion Financing, assuming all of the company’s outstanding Safes were issued on a post-money basis, 3 things will happen simultaneously in the round - though the calculations are ordered specifically, as follows:
All Safes and other convertible instruments convert into preferred shares
A stock option pool is created or increased to a pre-agreed percentage of the company
New money is invested in the company
YC’s $125k Safe will convert in the priced round into 7% of the company’s equity (including any existing option pool) after all the Safes and other convertible instruments have converted in conjunction with the priced round.
YC’s MFN Safe will automatically convert in the priced round on the terms of the lowest cap Safe (or other most favorable terms, such as a discount) issued between the specific MFN start date (around the start of the batch) and the priced round.
The priced round itself, and the creation or increase of the stock option pool, will dilute YC’s ownership.
The pro rata right, mentioned above, means YC has the right to purchase a portion of the new money securities issued in the financing in order to help maintain our ownership stake. If we exercise the pro rata right, step #3 then includes our additional new money investment.
Additional Future Financing Rounds: When you conduct subsequent rounds of financing, we continue to have a participation right to help maintain our ownership stake.
Incorporating
We invest in US, Cayman, Singapore, and Canada corporations. If you haven’t incorporated a company yet, don’t worry about it; we will help you do that if you are accepted to YC.
We have startups that apply to YC from all around the world and many have already incorporated in their home countries. If you’ve already incorporated your startup in another country that is not one of the those above four, you will need to “flip” your corporate structure to have a parent company in one of the four countries. In these cases, we introduce founders to lawyers who can work out the best process for doing this. Often, the original entity will become a subsidiary of a new parent company and will continue to operate in the startup’s home country; the parent company will be the ultimate owner of all your startup’s intellectual property and assets, but IP can be held at the subsidiary or parent level – that’s your choice.
