Is Y Combinator Worth it by Numbers?

M

manofsteelandvelvet

New member
Lately, there have been a lot of discussions about whether Y Combinator is worth it. I crunched some numbers to model different scenarios and different start-up valuations to compare whether the YC's deal is any good and what the other options are.

Comparison and cap table calculations: Is Y Combinator Worth it by Numbers?

In general, thinking about the 7% of the Y Combinator's Safe and whether it's worth it is the wrong mental model to start with. It’s like announcing winners and losers in a race immediately after the start and before anybody even runs half a distance.

The thing is the 7% Safe is just Step 1 in the priced Seed round when YC’s shares convert—and there are 2 more steps that depend on the round valuation.

It’s not worth thinking about how big or small a share Y Combinator gets since there is also the mandatory stock option pool and a new VC's share. The main number to compare that’s important for founders is how big a share they are left with after the priced round is done.

Anyway, I modeled 3 scenarios (1: YC's Safe + VC Seed, 2: VC Seed Only, 3: VC Pre-Seed + Seed) with 6 different start-up valuations ($5M, $7M, $10M, $15M, $20M, and $25M) of the Seed round for each scenario to compare founders' share as a result: Is Y Combinator Worth it by Numbers?

Scenario 1: Y Combinator Safes + VC Seed Round

All scenarios, all valuations
 
@sherelle Pretty much. Also, not losing a big chunk of a start-up's share in a Pe-Seed round—preferably less than 7%—is very helpful to stay on track. Though, getting a $10M Seed is not that easy.
 
@manofsteelandvelvet Not everything has to be about the money. The relationships you may make through YC alone could be worth literally millions of dollars.

Everybody wants to make money. The "equity stake" or share of ownership can become such a HUGE distraction.

The total value of a SAFE agreement with YC isn't just in the financial investment, the total investment includes insights, relationships, introductions and other elements that can make the difference between success and failure.
 
@meki I won't argue that. I particularly mentioned that in the post. The intangible value YC provides is very subjective and different for every participant. But if we look for any measurable thing to compare, it will be numbers. Founders' share is a pretty relatable and clean measure to compare.
 
@ron351ne It doesn't look good. For example, let's consider a $3M post-money valuation. All scenarios collide:

Scenario 1 . Y Combinator (Safes) + VC (Seed): Founders keep 64.4%

Scenario 2. VC (Seed Only, No Pre-Seed): Founders keep 63.3%

Scenario 3 . VC (Pre-Seed + Seed): Founders keep 63.0%

By this time, I'd say that this start-up is on the verge of becoming un-investable—the founders' share is too small and they still didn't raise enough money. They'll need much more and lose even a larger percentage of the start-up. They will lose motivation to continue working. Investors don't like such situations. I mean it's ok if a start-up has already found product-market/fit and grows, but at the very early stage this doesn't look good.

Here you may download the Excel file and input other valuations. E.g. $3M instead of $5M: https://bit.ly/yc_captable
 
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