Many assumed that the plan to invest more capital into startups that take part in the Y Combinator program was a good one.
The earliest stage of investing may have been changed by the US program and investing group with hundreds of companies in each of its classes. The offers of professional early-stage investors around the world may lose their luster.
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Prior to the change, Y Combinator offered $125,000 to its participants in the form of a simple agreement for future equity, or SAFE, that reserves 7% of participating startups' equity on a post-money basis. The dollar amount of the SAFE will not convert into an automatic percentage stake of the company in question because it is uncapped.
It may not seem like a big deal if you compare it to the mega-rounds and the huge unicorn horde waiting by the private-market exits.
Early-stage investors are paying attention. According to Mike Asem, a partner at the Midwest-focused M25 venture capital shop, the new terms help Y Combinator, but come with tradeoffs for the group and founders themselves.
The fact that investors across the globe are less than enthusiastic about the change is worth considering.
Is Y Combinator changing the early-stage startup investing game? Or did it give the companies more time to reach their next stage of maturity? There may not be a more important early-stage question this year, given the sheer number of checks that Y Combinator writes and how much weight its imprimatur carries around the world.
We asked investors and founders their opinion on the matter. Asem, Pejman Nozad, Nathan Lustig, Siggi Simonarson, and Torben Friehe are the others.
We will look at the impact that the new deal may have on startup founders. We will discuss what the new transaction terms mean for Y Combinator, whether the change was timely, and what negative impacts could crop up around the world at different investing stages. Let's go!
The new YC standard deal will affect founders.
The new standard Y Combinator deal will benefit some of the founders.
The most popular guest on the Equity podcast is Floodgate, and he told The Exchange that the precommitment into a startup's Series A with the uncapped SAFE note is a vote of confidence for founders.
The new terms for one particular set of companies will be great for the Latin American companies that are extremely early, with no traction, and don't have access to U.S. networks. The extra money will help them.
The investor wrote that the startups that are not hot, that feature an underestimation founder, or that simply want to chart their own path forward, could be winners from the new terms.
The new terms could help startup companies raise more money, especially those that don't have an office in San Francisco or a network of friends.
The founder's perspective.
We will get back to investors soon, but we need to hear from some Y Combinator founders.
Simonarson said the new terms may provide more leverage for the founder. How so? The old investment terms put a lot of pressure on the batches to raise money or risk running out of money.
He said that founders can wait until they have good user metrics that allow them to raise on good terms. Simonarson said that if the company had access to a similar deal, the money would have lasted his company well over two years, which he said was quite a lot of time to build a product, learn, and make resulting.
The new deal terms are great news for the companies that haven't previously raised capital, said Friehe of Wingback.
Friehe said that Wingback didn't need the capital, but that the extra cash would be helpful and allow them to grow faster than they previously anticipated.
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