The recently announced proposal by y Combinator to spend additional funds on entrepreneurs participating in its accelerator program is causing more controversy than many expected. The U.S. program and investing organization, which has hundreds of companies in each of its accelerator classes, may have fundamentally changed the earliest stage of investing by raising its so-called “standard deal” to include an additional $375,000 in its so-called “standard transaction.”
Professional early-stage investors around the world may see their offers lose luster, potentially altering how Y Combinator’s youngest entrepreneurs deal with outside finance. Prior to the move, Y Combinator offered $125,000 in the form of a simple agreement for future equity, or SAFE, which reserved 7% of participating businesses’ equity on a post-money basis.
The new $375,000 SAFE, which is now part of YC’s standard transaction, is uncapped, which means the dollar amount will not automatically convert into a percentage interest in the company. When compared to today’s slew of mega-rounds — those nine-figure checks that seem to arrive at all hours of the day — and the army of unicorns lining up at the private-market exits, an extra $375,000 might not seem like much.
Early-stage investors, on the other hand, are paying attention. The new rules benefit Y Combinator but come with “tradeoffs” for the group and founders, according to Mike Asem, a partner at the Midwest-focused M25 venture capital firm. Naturally, Asem is promoting his own book, but the fact that investors all around the world are dissatisfied with the change is worth noting.
Is it possible that Y Combinator has transformed the early-stage startup financing game in its favor? Alternatively, did it simply give its portfolio firms more time to reach the next stage of maturity? There may not be a more important early-stage question this year than how many checks Y Combinator writes and how much weight its imprimatur carries around the world. We polled investors and founders for their thoughts on the topic. Asem, Pejman Nozad of Pear VC, Iris Choi of Floodgate, Nathan Lustig of Magma Partners, Siggi Simonarson, co-founder of BuildBuddy, which participated in a Y Combinator class in 2020, and Torben Friehe, co-founder of Wingback, which is part of the Winter 2022 YC batch, all leave notes.
We will look at how the new deal may affect both seasoned and inexperienced company entrepreneurs. We will also talk about what the new transaction conditions mean for Y Combinator if the change was long overdue, and what negative consequences could arise at various points of the investment process around the world. Let us get started!
More money is money, and the new standard Y Combinator contract will benefit some founders significantly. The “precommitment” into a startup’s Series A “with the uncapped SAFE note is a vote of confidence for founders, especially maybe those who decide to go through YC in part because it de-risks their future fundraises,” Choi of Floodgate told The Exchange, perhaps even more so when compared to “founders who would have no trouble raising.”
“The new contract is going to be wonderful for the Latin American companies that are incredibly early, with no traction, and don’t have access to U.S. networks,” Lustig of Magma said. They will benefit from the additional funds.” The same investor stated that the new parameters might benefit firms that are not “hot,” have an “underappreciated founder,” or simply wish to forge their own way forward based mostly on revenue. So far, things appear to be going well – the new rules may make it easier for businesses to raise funds, particularly those with founders who do not have a Stanford network or an office near South Park in San Francisco.