The Y Combinator Deal

By Kirsty Nathoo · June, 2020

We have a standard deal for all our investments. We invest $125k on a “post-money” Simple Agreement for Future Equity, and we enter into an agreement with the company and founders that sets out some YC-specific guidelines and rights, including a participation right to invest in the company’s future financing rounds (the “YC Agreement”).

In practice, this is how it works:

YC Batch Investment: We’ll invest $125k in return for 7% of your company using a “post-money” Simple Agreement for Future Equity (the “YC Safe”). We think that $125k is currently the right amount for founders to be able to run their company and pay expenses for around 5-6 months, and sometimes even longer. The YC Safe will 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). YC, the company, and the founders also sign the YC Agreement.

Safe Conversion Financing: In a priced round, assuming all safes are on a post-money basis, 3 things usually happen simultaneously but the calculations are ordered specifically:

  1. All safes convert into preferred shares
  2. An option pool is increased to a pre-agreed percentage of the company
  3. New money investors purchase preferred shares at the price per share of the preferred stock sold in the round.

Immediately after step #1, YC should own 7% of the company. However, the new money investors and the option pool increase in steps #2 and #3 should dilute the YC Safe and all other converting safes, assuming those safes are standard post-money safes. We have a participation right pursuant to the YC Agreement 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. It’s important to note that YC will end up with less than 7% ownership after step #3, even if we exercise our 4% participation right.

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, but our participation right is capped at our then-current ownership if our ownership before the round is less than 4% (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 investment, YC companies receive access to a wide range of resources. Here is a full list of the benefits and resources available to YC founders, including the Series 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.