We live in an era where major founder leverage is a fact of life in the startup world. Unlike the bubble era, founders today - or at least those that are among the most talented - have substantial power in determining the direction of their ventures and the investors who most benefit from this are those who win their favor and align their interests along with those of such founders.
YC is an innovative venture capital firm whose model depends heavily on its maintaining credibility with the talented founders who run the ventures it funds. In this sense, it has caught the spirit of the age brilliantly and that is why YC stands out as one of the premier investment firms of our era.
A key element in this approach is for YC to do what it has done all along and that is to take common stock instead of the almost sacrosanct preferred stock that VC firms have always insisted on in the past. This radical innovation in VC-style funding has set YC apart from the pack of VC firms, incubators, and any and all other manner of investor wanting to hitch their wagon to the talented founders who are capable of building successful, massively scaling ventures that seek to transform all of world commerce. Its importance cannot be emphasized enough as a key to YC's success. It has enabled YC both to be in the midst of the fray and to stand above it, all at the same time. It is the founder's ally even while it benefits mightily as an investor.
What then to do after the founding stage to avoid dilution to its initial investment stake without jeopardizing credibility with founders? If YC were to pick and choose in participating in early follow-on rounds, this would selectively help and simultaneously hurt the various founders it works with. Almost by definition, the fact of such an investment would brand some YC ventures as in and others out of YC favor, a result that would prove highly damaging to the aura of goodwill that is not only helpful but absolutely indispensable for YC to maintain with its founders.
So how to maintain that goodwill and still avoid subsequent dilution in the various investment rounds that inevitably follow from the inception of star-quality companies?
Well, you can set up some fixed rules, make such follow-on pro rata investments automatic within the defined bounds that make sense for YC, and use that as a way of extending YC's leverage to help it keep the 7% (or whatever) stake it begins with in each venture.
And that is precisely what YC has done here with its pro-rata program.
Founders usually have no problem with early stage investors being able to participate pro rata in later rounds as long as they are significant investors and as long as such participation does not jeopardize their ability to raise later-stage money on good terms.
YC is of course a significant investor.
As to jeopardizing future funding terms, I believe YC has made a judgment call here that the investors it typically works with will have no problem taking something less than their accustomed full pieces in the later rounds to accommodate YC and will therefore continue to finance YC ventures exactly as before. Hence, no prejudice to founders and no loss of goodwill or credibility among founders.
I believe this is a sound calculation. YC has been able to persuade VCs to deviate from a variety of their traditional rules/requirements as part of being a part of the YC universe. This is just one more to be added to the list. It is a world of increased founder leverage and that means investors who want to stay with the deal flow need to adjust and adapt. I think they will do so here as well.
In a worst case for YC, this might prove a failed experiment. But the downside of the experiment's failing is minimal while the upside in being able to avoid later-stage dilution among a vast group of potentially valuable ventures is huge. Thus, this makes eminent sense for YC for sure and probably for its founders too. As for the VCs who will have to adapt a bit, they will survive and very likely continue happily investing just as before. At least that is how I read it.
1 copywriting quibble: "We live in an era where major founder leverage ..." -> it's not an era, it's more like a few years and it could flip pretty quickly.
Maybe I'm reading something wrong here, but I think this actually substantially complicates the YC decision calculus. YC today is an overwhelmingly good proposition and so I do think they can add this without turning any off, but this does make further rounds either slightly harder or more expensive.
If a VC wants to own 20% at the end of an A, or 10% after a B, having YC in there with rights to buy back up to their 7% can add real dilution you wouldn't have otherwise wanted or needed to incur. As someone who did a party round seed and had a crowded A, it really does add up; though, it's for sure a first world problem and won't kill you, whereas YC for many companies is when they get serious.
YC is so valuable that this won't turn anyone off at the traditional YC early stage, but I wonder how this will affect things for the "late-early" companies they've been taking more of in the last few batches.
I tend to be optimistic about things YC does until proven otherwise, they've earned that. Having pro rata rights is a reasonable way for YC to deploy a lot more capital in a signaling-neutral way, with some inherent bias towards companies that are doing better.
You are right that it does substantially change things for ownership conscientious investors.
There are myriad other issues as well, perhaps the two most interesting are:
1. When I went through YC, it was emphasized that YC had the same equity situation as founders. That's certainly not the case now.
2. Pro rata is often an actively managed situation, I'm curious how YC will handle situations where founders/future investors seek to retroactively adjust pro rata
The numbers are pretty small. Pro rata doesn't apply to employee option pool dilution, so it's really probably only 5% of a round. If a VC says they will do an investment if they can own 20% but not 19% of a company, I believe they are lying.
I don't know how much this really affects dilution. Without YC doing this, your shares would represent 80% of their previous value (X + .2 Z = Z). If YC adds so it maintains 7%, you would have 78%(X + .2 Z + (.07 Z - 0.07 X) = Z, .93 X = .73 Z)
So if you have 30% right now, you would have either 24% without YC taking part or 23.4% if they do.
If a VC is in a position to dictate the deal structure, then all the old terms are subject to renegotiation, anyway. Founders whose best option is to raise money with accept-a-bad-cap-table-or-go-under terms probably aren't going to be hosed because of YC blind exercising their option.
I may not be fully understanding the situation, but it seems to me that the only time YC exercising their option would create a lot of friction is when the round leader has a problem with YC's participation. While not a red flag, that would certainly be the subject of an important conversation.
In the end, raising money is a founders' bet that the funders are trustworthy.
You could always choose to ask for less money. Some VCs might turn you down if you say "actually, we don't need that much, thanks", but it seems unlikely that all will.
YC has forgone billions by not maintaining their pro rata share in the past. Later VCs got that extra money. Now YC will get it. Seems fair, correct, and much better for the world. They'll do useful things with it. Another very impressive improvement. Keep 'em coming!
I've always thought being an LP in YC would be fantastic because of the valuation bump companies get on demo day. Let's say a company could raise money at $5mm valuation, but instead gives 7% to YC, and as a result can raise at a $10mm valuation => (1) founders win by keeping more equity, (2) YC wins by their investments getting cash with less dilution, and (3) post-YC investors pay more (maybe still great investments, but not as good as getting in at $5mm).
But to maintain 7% in companies up to a $250mm valuation, it seems that the vast majority of YC's deployed capital will be in the place of what was previous a "post-YC" investment.
YC should still be in the business of finding great companies, but might not makes sense for them to help get gangbuster valuations at demo day.
It occurred to me that this shifts YC incentives from the early-stage to the late stage. They're not as incentivized to get great valuations at demo day, but they're more incentivized to continue assisting startups throughout their lifetime.
Whether this is good or bad for a founder depends on what they're using YC for. It may remove the immediate valuation "pop" from the calculus: right now, YC is almost worth it regardless of what they do because whatever equity they take ends up coming out of future investors' shares through the the valuation pop, and that effect may disappear. OTOH, it also means that YC can be expected to help provide advice and introductions throughout later rounds as well, as they maintain their financial incentive all the way up to $250M.
It seems to fit with YC's stated mission of trying to build more sustainable, world-changing businesses, along with other actions they've taken like experimenting with late-stage funding and taking on more partners with operational experience.
Funding rounds dilute preexisting investors. One of the possible terms in an investment contract are pro-rata rights for investors, giving them the right during future financing rounds to invest more money to maintain their percentage ownership. Thus an early seed investor who gets 5% of the company for 500k can ensure they retain 5% of the company in the A and B rounds, so long as they're willing to fork over the cash for the top-up shares at the A and B round valuations.
This is an important part of VC strategy. VCs invest in, say, 10 companies, expecting 8 to fail outright. The 2 winners need to make up for the 8 losers. But the investor can't see into the future to figure out which are the 2 winners. Pro-rata rights give them some optionality: by the time the A round happens, it'll be clearer to the investor whether they should have plowed more money into that company, and pro-rata lets them do that.
The problem for YC is that each YC batch has 30-50 companies in it, most of which will fail. When those companies go to raise later rounds, new investors want to know whether YC believes in them. If YC exercises pro-rata rights on just some of their companies, the ones that don't see the exercise are damaged goods. So instead, YC is committing themselves to pro-rata all their companies (this is a lot of companies) so long as they can afford it.
if you are a YC company, they own a percent of your company (usually around 7%). If you raise additional funding later, this will dilute every shareholder's percentage down to accommodate the new investor.
Traditionally YC did not have Pro Rata, which is the right to basically participate in the new round, to retain their original ownership percentage.
Scenario:
YC owns 7%
New investor comes in and buys 20%
YC dilutes 1.4% (which is 20% of their shares)
With Pro Rata, YC could participate in the new round up to 1.4% of the total price of the company to maintain their 7%.
Why this can be important:
VCs are like beautiful but often panicky gazelles. They are easily spooked, and find comfort in the direction the herd is going.
If an investor in a company in the previous round doesn't reinvest, this may look bad and cause them to back out.
If YC invests in everyone's Pro Rata, it means that there'll be no apparent signal for the gazelles to act on. They'll hafta rely on their own judgement (crazy, I know.)
Related: is there some reliable "startup jargon for dummies" page somewhere? I'm often confused with all the talk of rounds, vesting, dilution, and whatnot. I know there are books, but I'm not planning to get into the startup scene; buying a book doesn't seem worth it to be slightly less confused on a website I waste lots of time on.
Pro-rata means that early investor reserves its right to participate in future financing rounds, up to such amount as to maintain their ownership share.
YC did not do it before, but will start doing it now. They do not want to be leading investor, however, b/c if they do follow-up investments in one company but not the other, that would signal other investors their preferences, and will make financing prospects of companies they did not subsequently invest in, difficult.
Early round investors would be diluted by subsequent rounds, so they protect against that by putting the pro-rata provision in the contract that lets them invest in later rounds (so that they can reverse the dilution).
In the past YC decided not to exercise this right because if they did so selectively, it could be used to indicate what YC thinks about a company, which is mostly bad for those that didn't get re-investment.
The change is that YC is now going to have an objective, public criteria for exercising this right, so it can't be used as a signal, but YC partners/investors can get the benefit of the rights they negotiated for.
To put this in context YC is pro-rating its 7% to maintain that level until companies have $250m valuation.
YC companies to date have raised $3bn in total so far, with a couple dozen above $100m out of just over 800.
Therefore at most YC would have invested $210m if they'd done this from the start.
It basically adds up to a couple hundred thousand on Series A, 0.5-0.8m series B, $1-2m at series C, then at series D you'd hope to be approaching $250m
Given a propertied fund size of $1bn this makes sense in backing winners probably funding 200 companies a year at $200-300m/year, particularly as major pickup in valuation is A to C
Does that mean YC will fight against the "Major Investor" clauses in funding rounds that only allow pro rata rights to investors who have X% ownership?
Of course, 7% might be enough to overcome the threshold in many cases, but as an angel investors in YC deals, I have lost my pro rata rights following a YC Note/SAFE conversion this way (despite the docs suggesting I am protected).
It depends on how the YC pro rata rights are documented. It's entirely possible that their pro rata right will be completely independent of any later pro rata right for major investors (i.e., the major Series A investors might get their pro rata rights in addition to the continuing YC pro rata).
That blog post is helpful but not the best source of info. For one, it confuses preemptive rights (right to buy a % of future financing) with first refusal rights (right to buy shares from other current stockholders who try to sell). And second, it's rather one-sided. Companies understandably want to limit these rights to only big investors for a number of reasons but especially because (1) it really can be expensive/time consuming to continually contact or chase down signatures from an investor base that eventually might include dozens of people/entities, (2) it can make it really hard to convince new investors that the investment will be worthwhile when there are pro rata rights to buy up a huge chunk of the round and (3) there's a major signalling problem when the prior angels have these rights but choose not to use them (the author mentions that he always demands these rights but doesn't always use them, which can scare off other investors and, what's worse, many angels will decline for innocuous reasons such as a seed-stage only investor who never does follow-ons or a smaller angel who is priced out by a high valuation).
I don't presume to know more about this stuff than the YC people, who are scarily good at it but this is a significant departure from 'our goals are 100% aligned with those of the founders, what's good for them is good for us'.
I guess it's a question of whether on average YC is as good or better a post seed stage investor as the average VC who invests in YC companies. If YC is as good or better, then the pro rata is aligned with founders' interests since the founders are raising X dollars at Y valuation either way and it's just a question of which pocket the money comes from...it's still the same color.
In the universe of unicorns and rainbows, YC's participation puts the rest of a round's participants on their good behavior to reduce risk on future deal flows and the founders get a better deal. The situation in the universe with evil Spock is of course different, but it was going to turn out that way in that universe. In between a founder could probably ask YC not to participate. Since the investment is blind and YC is under scrutiny by potential founders, it may not be in YC's interest to force the issue and suffer Tweets of outrage.
The potential problem is a bad cap table and the first order issue is VC that treats that as an acceptable byproduct of a round it is leading or a company that does not have better options.
Yes, this is YC acting more like an investor and less like a founder-supporter which may turn into an interesting trend. However, I don't think pro-rata or participation rights are problematic as they encourage follow-on investment which is usually desirable. The downside to rights like this is a minor increase in the complexity of completing investment rounds.
"We will try to do this for every company..." If for some reason this term is not exercised, it will now unequivocally reflect badly for the company. I don't question the good nature and authenticity of a YC "try", but the sentence does naturally express doubt.
We will do it whenever we possibly can--our goal is 100%. There have been occasional instances where a company doesn't get us docs until 3 hours before a close or something.
The pro-rata provision is only for raises of $100M or more post-money. Is YC only going to do these transactions for post-money between $100M and $250M? Or will you ask to be part of raises below $100M?
I guess this is a way for YC to participate in the upside of the most successful companies without creating signaling risk. But from a pure investment perspective, there's a possibility it might not end up being that prudent. It will all depend on the home runs. If YC can create a few multi-billion dollar companies, this will work out well.
Looks like there's a useful built-in selection bias. YC commits itself to investing in future rounds, but only good companies will be able to raise future rounds, so they probably won't get stuck doubling down on too many failing companies.
it's actually hard to generate really high returns without doing prorata. If you don't do it and you invest into 1,000 companies, your pot of money is spread mostly over companies not doing well. If you keep pro-rata it will be more concentrated among companies that are raising subsequent rounds, which is correlated with doing well. Thus, your money will lean naturally towards better companies
I have noticed this language about avoiding signaling in previous YC announcements and I think its a great thing to be cognizant of. Setting aside the fact that YC itself is an enormous signal, its a sign of maturity to realize that even your inaction is a signal. I imagine there was feedback from past YC classes who didn't receive follow-investments that were suffering more from the absence of YC than simply the lack of those funds.
Once you realize that you could either stop funding companies after graduating altogether or invest in all of them, both of which remove the signal. With the funds they have, clearly there is considerable risk tolerance for the latter.
Just curious, will this change how SAFE docs are structured? IANAL, but right now SAFEs make it challenging for seed investors to get pro rata. That has already been frustrating, and becomes a little more frustrating if YC automatically gets pro rata on top of that. I know it's a free market, and I don't have to invest if I don't like the terms, and so on, but it feels weird for me if YC takes pro rata by default, while their default docs for seed investors are stingy with pro rata rights.
I wonder if this is truly founder friendly. Pro rata is a right given, and 7% changes a lot of the calculus when doing a round that is probably 20% to begin with. Hopefully this goes along with YC asking for less equity, or some other allowance. (IMO, most incubators already ask for much more than they're worth, though YC obviously being a bit different.)
Eh, it's really not such a big deal. Maintaining 7% in a round for 20% total only lets YC buy 1.4%. As sama said elsewhere, the difference between 20% and 18.6% (with an equivalent reduction in their $ invested) shouldn't change much for a serious VC.
Given YC's history and reputation of being very supportive of founders, any founding team is also probably better off with YC taking a cut in a round that would otherwise go to another investor, especially given that the list of investors who are as founder-friendly as YC is pretty short.
I don't see the reason to send no signals. There must have been at least one situation where investing in a followup was bad. Declaring a strategy like that is puzzling, I assume they have run a simulation
[+] [-] grellas|10 years ago|reply
YC is an innovative venture capital firm whose model depends heavily on its maintaining credibility with the talented founders who run the ventures it funds. In this sense, it has caught the spirit of the age brilliantly and that is why YC stands out as one of the premier investment firms of our era.
A key element in this approach is for YC to do what it has done all along and that is to take common stock instead of the almost sacrosanct preferred stock that VC firms have always insisted on in the past. This radical innovation in VC-style funding has set YC apart from the pack of VC firms, incubators, and any and all other manner of investor wanting to hitch their wagon to the talented founders who are capable of building successful, massively scaling ventures that seek to transform all of world commerce. Its importance cannot be emphasized enough as a key to YC's success. It has enabled YC both to be in the midst of the fray and to stand above it, all at the same time. It is the founder's ally even while it benefits mightily as an investor.
What then to do after the founding stage to avoid dilution to its initial investment stake without jeopardizing credibility with founders? If YC were to pick and choose in participating in early follow-on rounds, this would selectively help and simultaneously hurt the various founders it works with. Almost by definition, the fact of such an investment would brand some YC ventures as in and others out of YC favor, a result that would prove highly damaging to the aura of goodwill that is not only helpful but absolutely indispensable for YC to maintain with its founders.
So how to maintain that goodwill and still avoid subsequent dilution in the various investment rounds that inevitably follow from the inception of star-quality companies?
Well, you can set up some fixed rules, make such follow-on pro rata investments automatic within the defined bounds that make sense for YC, and use that as a way of extending YC's leverage to help it keep the 7% (or whatever) stake it begins with in each venture.
And that is precisely what YC has done here with its pro-rata program.
Founders usually have no problem with early stage investors being able to participate pro rata in later rounds as long as they are significant investors and as long as such participation does not jeopardize their ability to raise later-stage money on good terms.
YC is of course a significant investor.
As to jeopardizing future funding terms, I believe YC has made a judgment call here that the investors it typically works with will have no problem taking something less than their accustomed full pieces in the later rounds to accommodate YC and will therefore continue to finance YC ventures exactly as before. Hence, no prejudice to founders and no loss of goodwill or credibility among founders.
I believe this is a sound calculation. YC has been able to persuade VCs to deviate from a variety of their traditional rules/requirements as part of being a part of the YC universe. This is just one more to be added to the list. It is a world of increased founder leverage and that means investors who want to stay with the deal flow need to adjust and adapt. I think they will do so here as well.
In a worst case for YC, this might prove a failed experiment. But the downside of the experiment's failing is minimal while the upside in being able to avoid later-stage dilution among a vast group of potentially valuable ventures is huge. Thus, this makes eminent sense for YC for sure and probably for its founders too. As for the VCs who will have to adapt a bit, they will survive and very likely continue happily investing just as before. At least that is how I read it.
[+] [-] petervandijck|10 years ago|reply
(Sorry couldn't help myself.)
[+] [-] frisco|10 years ago|reply
If a VC wants to own 20% at the end of an A, or 10% after a B, having YC in there with rights to buy back up to their 7% can add real dilution you wouldn't have otherwise wanted or needed to incur. As someone who did a party round seed and had a crowded A, it really does add up; though, it's for sure a first world problem and won't kill you, whereas YC for many companies is when they get serious.
YC is so valuable that this won't turn anyone off at the traditional YC early stage, but I wonder how this will affect things for the "late-early" companies they've been taking more of in the last few batches.
[+] [-] daniel_levine|10 years ago|reply
You are right that it does substantially change things for ownership conscientious investors.
There are myriad other issues as well, perhaps the two most interesting are:
1. When I went through YC, it was emphasized that YC had the same equity situation as founders. That's certainly not the case now.
2. Pro rata is often an actively managed situation, I'm curious how YC will handle situations where founders/future investors seek to retroactively adjust pro rata
[+] [-] sama|10 years ago|reply
[+] [-] dsugarman|10 years ago|reply
So if you have 30% right now, you would have either 24% without YC taking part or 23.4% if they do.
[+] [-] brudgers|10 years ago|reply
I may not be fully understanding the situation, but it seems to me that the only time YC exercising their option would create a lot of friction is when the round leader has a problem with YC's participation. While not a red flag, that would certainly be the subject of an important conversation.
In the end, raising money is a founders' bet that the funders are trustworthy.
[+] [-] pbreit|10 years ago|reply
[+] [-] JoshTriplett|10 years ago|reply
[+] [-] staunch|10 years ago|reply
[+] [-] jparker165|10 years ago|reply
I've always thought being an LP in YC would be fantastic because of the valuation bump companies get on demo day. Let's say a company could raise money at $5mm valuation, but instead gives 7% to YC, and as a result can raise at a $10mm valuation => (1) founders win by keeping more equity, (2) YC wins by their investments getting cash with less dilution, and (3) post-YC investors pay more (maybe still great investments, but not as good as getting in at $5mm).
But to maintain 7% in companies up to a $250mm valuation, it seems that the vast majority of YC's deployed capital will be in the place of what was previous a "post-YC" investment.
YC should still be in the business of finding great companies, but might not makes sense for them to help get gangbuster valuations at demo day.
[+] [-] sama|10 years ago|reply
[+] [-] nostrademons|10 years ago|reply
Whether this is good or bad for a founder depends on what they're using YC for. It may remove the immediate valuation "pop" from the calculus: right now, YC is almost worth it regardless of what they do because whatever equity they take ends up coming out of future investors' shares through the the valuation pop, and that effect may disappear. OTOH, it also means that YC can be expected to help provide advice and introductions throughout later rounds as well, as they maintain their financial incentive all the way up to $250M.
It seems to fit with YC's stated mission of trying to build more sustainable, world-changing businesses, along with other actions they've taken like experimenting with late-stage funding and taking on more partners with operational experience.
[+] [-] coherentpony|10 years ago|reply
I have zero business acumen and have no familiarity with investing or how new companies work.
[+] [-] tptacek|10 years ago|reply
This is an important part of VC strategy. VCs invest in, say, 10 companies, expecting 8 to fail outright. The 2 winners need to make up for the 8 losers. But the investor can't see into the future to figure out which are the 2 winners. Pro-rata rights give them some optionality: by the time the A round happens, it'll be clearer to the investor whether they should have plowed more money into that company, and pro-rata lets them do that.
The problem for YC is that each YC batch has 30-50 companies in it, most of which will fail. When those companies go to raise later rounds, new investors want to know whether YC believes in them. If YC exercises pro-rata rights on just some of their companies, the ones that don't see the exercise are damaged goods. So instead, YC is committing themselves to pro-rata all their companies (this is a lot of companies) so long as they can afford it.
[+] [-] SandersAK|10 years ago|reply
Traditionally YC did not have Pro Rata, which is the right to basically participate in the new round, to retain their original ownership percentage.
Scenario: YC owns 7% New investor comes in and buys 20% YC dilutes 1.4% (which is 20% of their shares)
With Pro Rata, YC could participate in the new round up to 1.4% of the total price of the company to maintain their 7%.
Why this can be important: VCs are like beautiful but often panicky gazelles. They are easily spooked, and find comfort in the direction the herd is going.
If an investor in a company in the previous round doesn't reinvest, this may look bad and cause them to back out.
If YC invests in everyone's Pro Rata, it means that there'll be no apparent signal for the gazelles to act on. They'll hafta rely on their own judgement (crazy, I know.)
[+] [-] theOnliest|10 years ago|reply
[+] [-] mynegation|10 years ago|reply
YC did not do it before, but will start doing it now. They do not want to be leading investor, however, b/c if they do follow-up investments in one company but not the other, that would signal other investors their preferences, and will make financing prospects of companies they did not subsequently invest in, difficult.
[+] [-] loumf|10 years ago|reply
In the past YC decided not to exercise this right because if they did so selectively, it could be used to indicate what YC thinks about a company, which is mostly bad for those that didn't get re-investment.
The change is that YC is now going to have an objective, public criteria for exercising this right, so it can't be used as a signal, but YC partners/investors can get the benefit of the rights they negotiated for.
[+] [-] vasilipupkin|10 years ago|reply
[+] [-] memossy|10 years ago|reply
YC companies to date have raised $3bn in total so far, with a couple dozen above $100m out of just over 800.
Therefore at most YC would have invested $210m if they'd done this from the start.
It basically adds up to a couple hundred thousand on Series A, 0.5-0.8m series B, $1-2m at series C, then at series D you'd hope to be approaching $250m
Given a propertied fund size of $1bn this makes sense in backing winners probably funding 200 companies a year at $200-300m/year, particularly as major pickup in valuation is A to C
[+] [-] sama|10 years ago|reply
[+] [-] jedc|10 years ago|reply
18 YC companies have raised >=$50million - http://www.seed-db.com/companies/funding?value=50000000
[+] [-] leelin|10 years ago|reply
http://www.2-speed.com/2014/09/dreaded-major-investor-clause...
Of course, 7% might be enough to overcome the threshold in many cases, but as an angel investors in YC deals, I have lost my pro rata rights following a YC Note/SAFE conversion this way (despite the docs suggesting I am protected).
[+] [-] hobbyjogger|10 years ago|reply
That blog post is helpful but not the best source of info. For one, it confuses preemptive rights (right to buy a % of future financing) with first refusal rights (right to buy shares from other current stockholders who try to sell). And second, it's rather one-sided. Companies understandably want to limit these rights to only big investors for a number of reasons but especially because (1) it really can be expensive/time consuming to continually contact or chase down signatures from an investor base that eventually might include dozens of people/entities, (2) it can make it really hard to convince new investors that the investment will be worthwhile when there are pro rata rights to buy up a huge chunk of the round and (3) there's a major signalling problem when the prior angels have these rights but choose not to use them (the author mentions that he always demands these rights but doesn't always use them, which can scare off other investors and, what's worse, many angels will decline for innocuous reasons such as a seed-stage only investor who never does follow-ons or a smaller angel who is priced out by a high valuation).
[+] [-] jacquesm|10 years ago|reply
[+] [-] brudgers|10 years ago|reply
In the universe of unicorns and rainbows, YC's participation puts the rest of a round's participants on their good behavior to reduce risk on future deal flows and the founders get a better deal. The situation in the universe with evil Spock is of course different, but it was going to turn out that way in that universe. In between a founder could probably ask YC not to participate. Since the investment is blind and YC is under scrutiny by potential founders, it may not be in YC's interest to force the issue and suffer Tweets of outrage.
The potential problem is a bad cap table and the first order issue is VC that treats that as an acceptable byproduct of a round it is leading or a company that does not have better options.
[+] [-] davros|10 years ago|reply
[+] [-] tyrick|10 years ago|reply
[+] [-] sama|10 years ago|reply
[+] [-] brayton|10 years ago|reply
[+] [-] jim_greco|10 years ago|reply
[+] [-] snowmaker|10 years ago|reply
[+] [-] unknown|10 years ago|reply
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[+] [-] foobarqux|10 years ago|reply
[+] [-] ub|10 years ago|reply
[+] [-] briholt|10 years ago|reply
[+] [-] vasilipupkin|10 years ago|reply
[+] [-] unknown|10 years ago|reply
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[+] [-] philipodonnell|10 years ago|reply
Once you realize that you could either stop funding companies after graduating altogether or invest in all of them, both of which remove the signal. With the funds they have, clearly there is considerable risk tolerance for the latter.
[+] [-] lpolovets|10 years ago|reply
[+] [-] MatthewMcDonald|10 years ago|reply
[0] http://www.ycombinator.com/documents/
[+] [-] lmeyerov|10 years ago|reply
[+] [-] hobbyjogger|10 years ago|reply
Given YC's history and reputation of being very supportive of founders, any founding team is also probably better off with YC taking a cut in a round that would otherwise go to another investor, especially given that the list of investors who are as founder-friendly as YC is pretty short.
[+] [-] dataker|10 years ago|reply
Couldnt that keep outside investors away?
[+] [-] thomasrossi|10 years ago|reply
[+] [-] cfarm|10 years ago|reply