The Y Combinator Deal
We have a standard deal for all our investments. We invest $500,000 in every company on standard terms.
Our $500K investment is made on 2 separate safes:
- 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 MFN safe will take on the terms of the lowest cap safe (or other most favorable terms) issued between the start of the batch and the company’s next equity round. Simply put, we’re giving the company money now but at the terms you will negotiate with other investors later.
Both investments happen at the same time; they are not contingent on any milestones.
YC Batch Investment: YC, the company, and the founders sign the $125k safe and the MFN safe.
As part of our standard deal, we also enter into agreements with the company and founders setting out some YC-specific guidelines and rights, including a participation right to invest in the company’s future financing rounds.
The $125k safe and the MFN safe will each convert into preferred shares when your company raises money by selling preferred shares in a priced equity round, which we refer to below as the “Safe Conversion Financing” (this will typically be your “Series A” or “Series Seed” financing, whichever happens first).
Safe Conversion Financing: In a priced round, assuming all of the company’s outstanding Safes were issued on a post-money basis, 3 things usually happen simultaneously but the calculations are ordered specifically:
- 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 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.
We have a participation right pursuant to the YC Agreements to purchase up to 4% of the new money securities issued in the financing. If we exercise our participation right, step #3 then includes our additional new money investment.
Additional Future Financing Rounds:When you conduct later rounds of financing, we continue to have a participation right to purchase up to 4% of the new money securities. In the case that our then-current ownership is less than 4%, our participation right is capped at that amount (so we will never have a super pro rata right).
We invest in US, Cayman, Singapore, and Canada corporations. We have founders who apply to YC from all around the world and many have already incorporated in their home countries. We introduce founders to lawyers who can work out the best process for creating a company (or parent company) in a jurisdiction in which we can invest. Often, founders will keep their original entity as a subsidiary of a new parent company and the original entity will continue to operate in their home country.
Non-profits will receive a donation of $100k. We do not receive anything in return for our donation.
In addition to the investments described above, YC companies receive access to a wide range of resources. Here is a full listof the benefits and resources available to YC founders, including the Series A program, Post-A Program, Work at a Startup and the Growth Program.
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 such provisions.