On the $500k Y Combinator standard deal

The big news today in the Y Combinator ecosystem is that YC announced a new “standard deal” of $500k for each new startup. This will be structured as a $125k check for 7% equity + $375k check on an uncapped SAFE with an MFN. For the unitiated, you can learn more about SAFEs here and MFN terms in YC’s announcement linked above.

Because Rebel Fund is one of the most prolific investors in the Y Combinator ecosystem, I’m often asked what changes like this mean for YC startup founders and investors. In this post I’ll share my thoughts.

Before getting into that, it’s worth reviewing a quick history of YC’s standard deal:

2005 — At YC’s founding, they invested $20k for 6% of each company

2011 — Yuri Milner and SV Angel (later joined by other investors) began offering an additional $150k to every startup in YC via an uncapped convertible note + YC’s own $20k investment

2014 — YC invested $120k for 7% equity with pro rata rights

2018 — YC invested $150k for 7% equity (now on post-money SAFEs)

2020 — YC invested $125k for 7% equity and reduced their pro rata rights to 4% (in order to scale the program more)

So, while YC often tweaked its standard deal over the years, this new $500k deal is a major departure from the norm that will most certainly impact YC startup founders and investors. Here are the main ways I think it might:

1. YC will get *a lot* more applications. From a founder’s perspective, there’s a huge difference between $125k and $500k in guaranteed capital upon acceptance to YC. This will get the attention of thousands of startup founders from around the world who otherwise wouldn’t have applied to YC and motivate them to do so.
2. The profile of YC founders will evolve. YC founders are already older and more accomplished than most people realize, and the new standard deal will attract even more experienced founders — the kind who may not find $125k that compelling but will find $500k so. It may also attract more startups with capital-intensive and/or risky business models, since they’ll have more cash to throw at hard problems from day one of the batch.
3. YC batch quality will improve. As a natural consequence of #1 and #2 above, YC admissions can afford to be even pickier. This means stronger companies at Demo Day and more unicorns per batch.
4. Early pre-Demo Day investors will get squeezed out. Many YC founders these days raise their rounds in traunches, starting with smaller checks at lower valuations early in the batch, and ending with larger checks at higher valuations after Demo Day. Founders will no longer feel the need for the former since they’ll be well-capitalized right off the bat, and in addition, they’ll be disincentivized to raise capital at lower valuations since YC’s SAFE will convert at the lowest cap they raise money at due to the MFN clause. This likely means radio silence on the fundraising front until right around Demo Day when they’re in the best position to raise.
5. YC startup valuations will increase. Due to all of the effects above, it’s hard to imagine YC startup valuations not increasing. Not only will the founders be higher caliber, but their companies will be further along by the time they raise capital. The shifts the balance of power from investors to founders, which let’s face it, has been YC’s modus operandi from the start. I don’t think this is bad for investors though, because even though their equity in YC startups will get costlier, they’ll also be investing in better capitalized, more developed, more ambitious startups with stronger founding teams — and presumably better outcomes.

Here’s how I see the winners and losers in this new standard deal:

Winners:

Y Combinator — They’ll get more and better applicants, higher batch quality, and a larger equity percentage in YC startups to boot

Accepted YC startups — They’ll enjoy more capital, higher valuations, stronger peers, and a stronger YC brand halo effect

Smart and desirable investors — I’m defining “smart” as investors who aren’t overly valuation sensitive (which has never been a winning strategy in early-stage venture) and would rather invest in strong companies who need rocket fuel vs weak companies offering a deal. I’m defining “desirable” as investors who can win allocation in the best YC deals without relying on front-running the batch.

Losers:

Rejected YC startups — The downside of YC’s greater selectivity is that more startups will be rejected from the program, in both absolute and percentage terms. If it’s any consolation, YC misses great startups all the time, so keep pushing forward!

Dumb and undesirable investors — See above for my reasoning. Sorry if I’ve offended anyone.

While much of what I’ve written here appears black and white, there are also some shades of grey and potential unintended consequences worth noting. For example, might higher valuations drive away some great investors who can no longer afford to hit their ownership goals in YC startups? Might founders’ disincentive to accept smaller checks early in the batch prevent them from bringing onboard value-added angels? Might YC’s higher ownership percentage in companies coupled with lead investors’ ownership targets cause founders to get overly diluted early in their startups’ lifecycle?

Like many things in the startup and venture investing world, the new YC standard deal is an experiment, and I’m excited to see how it plays out.