The Y Combinator Deal

By Kirsty Nathoo · November, 2017

We have a standard deal at YC: we'll invest $120k in return for 7% of the company, plus we will continue to support your company by investing pro-rata in future equity rounds to maintain our ownership percent. We think that $120k is the right amount for founders to be able to run their company and to live in the Bay Area for around 5-6 months, and sometimes even longer. Most people don’t do YC for the financial investment—they do it because they want the advice, the help of the network, and the benefits of the program.

We invest in US corporations. We have founders who apply to YC from all around the world and many have already incorporated in their home countries. We will help you to work out the best process for creating a US company (or US parent company) in which we can invest. Often, founders will keep their original entity as a subsidiary of the US parent company and that entity will continue to operate.

The initial YC investment is structured as a Common Stock Purchase Agreement (“CSPA”) plus a Simple Agreement for Future Equity (a “YC Safe”). We buy our shares of common stock at the existing valuation of a company’s common shares. Often this is the price that the founders purchased their shares, but some companies may have done a 409A valuation or a priced round that has set the price of the common shares. This is usually a relatively low price, so the balance of our investment is the face amount of the YC Safe.

For us to calculate how many shares to buy so that we own 7% of the company, we look at issued and promised shares, options, warrants and any safes (or other convertible securities, like convertible notes) the company has already signed. We don’t take into account any shares that are currently unissued in an equity incentive (or “option”) plan. Since our investment is unlikely to trigger actual conversion of existing safes, we calculate how many shares those safes could convert into in future, using the cap on those safes as a guide.

We will continue to invest in the company in subsequent fundraising transactions. We have a specific clause in our CSPA, called a “pro-rata right” that describes this continued support. This is very important to us and we feel strongly about supporting all our portfolio companies to the fullest extent that we are able.

After YC, companies will most likely raise money on safes before raising money in a priced round. While our pro-rata right applies to those safes, we will defer its exercise until the priced round when those safes convert. In other words, we don’t invest every time your company raises money on safes (before the company’s first priced round after YC), instead we make a larger investment at the time of the first priced round after YC.

We will pay the same price as the investors in the priced round in order to approximately maintain our original 7% ownership at the close of each round. In that round, more shares will be issued to converting safeholders and to the investors who are putting in money into the priced round. We take all those new shares into account when calculating how many shares we buy to maintain our ownership.

In addition to the investment, YC companies receive access to wide range of resources. Here is a full list of the benefits and resources available to YC founders.

Non-profits will receive a donation of $100k. We do not receive anything in return for our donation.

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 companies 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 such provisions.