New Standard Deal
by Michael Seibel9/28/2018
We are changing the standard deal at YC and increasing our investment from $120K to $150K. The $150K investment for 7% will be made on a post-money cap safe. We believe the post-money safe is simpler, making ownership and dilution easier to understand.
This new deal will start with our Winter 2019 batch, and replaces our previous deal of $120K for 7%, which was typically executed by buying common stock coupled with a safe.
We believe our monetary investment is a small part of the many benefits of doing YC. But startup costs have undeniably increased over the past few years. We thought a $30K increase was necessary to help companies stay focused on building their product without worrying about fundraising too soon.
The other notable change is that we are investing on a post-money safe. And to be clear, when we say "post-money," we mean "post" the money from just the safes, not including the new money in the Series A. The post-money safe furthers our main intent: making fundraising as simple, fast, cheap and clear as possible for founders.
Until now, the safe has been standardized on a pre-money basis and inclusive of the Series A option pool increase1, which made it harder for founders to calculate precisely how they were being diluted when raising money. The answer to "how much of the company are we selling" was dependent on a recursive loop of how much was raised on other safes, plus a hypothetical assumption about the Series A option pool increase that would be negotiated years later.2 Our YC shares and safe became part of that equation, which added to the confusion.
The post-money safe, on the other hand, requires little more than simple addition and division. For example, a $500k safe at a $10 million post-money valuation cap means the founder has sold 5% of the company. Adding an additional $1M at a $16 million post-money valuation cap means the founder has sold 6.25% more, for a total of 11.25%. Add that to YC’s 7% from our post-money safe and founders will know where they stand heading into their Series A, which is critical since that round dilutes everyone further.3
Post-money safes create more certainty over ownership and dilution, and the math is far simpler. The trade-off for this is that each incremental dollar raised on post-money safes dilutes just the current stockholders, which is often the founders and early employees.
But after working with thousands of startups fundraising on safes, and having used safes ourselves when we were founders or individual investors, we are convinced that this trade-off is well worth it. The unknowable Series A option pool increase included in the pre-money safes similarly diluted just the founders and early employees, but the post-money safe excludes this, so that should have some offsetting effect. Valuations may also slightly increase now that investors will be more certain about what they will own. But most of all, being able to track dilution easily, accurately and in real-time is a much better way to help founders manage and understand stock ownership, enabling them to not only plan out their seed round, but also to plan ahead for their Series A. We repeatedly observed that founders couldn’t easily do this with pre-money safes. Like so many other aspects of startups, you can’t optimize what you can’t measure.
In conjunction with this change to our standard deal, we are releasing new versions of the standard safe that are based on this simpler post-money approach for any company to use when raising money. Also stay tuned for additional conforming updates to the rest of our website over the coming months.
These changes may seem minor, but that’s by design. Capital for startups has never been more abundant, and we’ll continue to focus on the things that remain hard to come by — community, simplicity, advice that’s systematic and personal, and above all, a great founder experience.
1. A pre-money safe expresses what the value of the company is prior to the safe investment. For example, if you have a $10 million pre-money safe and a $1 million investment, the implied ownership for the safe is something around 1/(10+1) = 9%. But because the valuation is pre-money, the implied ownership changes (i.e. is partially diluted) as more money is raised. If you raised another $1 million, then the same safe would imply ownership of 1/(10+1+1) = 8.3%. And so on and so forth. However, we say "something around" those numbers because the Series A option pool increase is also included in the pre-money valuation, which forces the existing cap table to bear all of the option pool dilution rather than sharing it with the safe holders. So the true calculated ownership of the safes may end up being more or less than the 9% or 8.3% in the above example. Confused yet? Exactly. The pre-money concept and the inclusion of the priced round option pool increase all made sense in the past when safes were essentially short-term bridges to a priced round, but the market has since evolved, and companies now regularly raise $2-3 million on safes to replace seed rounds.↩
2. With each round of financing, the option pool is usually increased to provide options for new hires following that round. Pre-money safes diluted the current stockholders by the existing option pool plus the increase associated with the Series A. This is another thing that made sense when safes were short-term bridges, but once they became independent seed rounds, including the Series A option pool increase in the safe meant that the current stockholders were taking all of the dilution for two rounds of hiring. The post-money safe will still cover the existing pool, just not the Series A increase. We encourage all of our startups to adopt reasonable pools in advance of their seed rounds and to be generous with their earliest employees, and will continue to do so.↩
3. The Series A is an entirely new round, separate from the safes, so the dilution will be spread across the founders, other existing shareholders and the safes. Mechanically, the cap table is updated with all of the safes being converted into shares right before the round, with the Series A new money then diluting everyone proportionally. Occasionally, the Series A valuation will be below the valuation of the safes, in which case, the safe holders will receive more ownership than implied by the valuations associated with their safes. This is true for both pre-money and post-money safes. But safes are generally intended to be used for seed rounds and associated valuations, so in the rare event that the Series A valuation is lower than the seed valuation, there are likely bigger issues.↩
Michael Seibel is a Group Partner and Managing Director, Early Stage at YC. He was the cofounder and CEO Justin.tv and Socialcam. Socialcam sold to Autodesk in 2012 and Justin.tv became Twitch.