Y Combinator, one of the world’s largest technology startup accelerator’s made an announcement that has seen a lot of chatter in the global VC and technology startup space; they decided to make amends to their standard deal which will see them investing up to $500,000 but under new standard terms that can be seen as a win-win for everyone or guarantees a win for YC if you succeed in the future.
YC’s first African investment was in 2009 but since they ramped up interest in African startups in 2015, they have easily become the Kingmakers for African startups with success stories like Flutterwave, Paystack, Kobo360, Cowrywise, etc. They provide an indicator that as a startup you have the potential to be successful and other investors should look deeper at you in line with the accelerator’s founding goals of ” Getting you through the first phase….. This usually means: get you to the point where you’ve built something impressive enough to raise money on a larger scale. Then we can introduce you to later stage investors—or occasionally even acquirers”.
Y Combinator’s New $500,000 Announcement
In the words of Geoff Ralston, President of Y Combinator who made the announcement in a blog post;
“We have a new standard deal at Y Combinator. When a company is accepted into the YC batch program, we now invest a total of $500,000. We still invest $125,000 for 7% and now also invest an additional $375,000 on an uncapped safe with an MFN1.
This is the type of deal that we have wanted to offer YC founders for years — and with the recent success of YC companies, including ten IPOs in 2021 and more to come this year, we are now able to do so. This sum will enable founders to focus on launching, building, and scaling their company. It will remove the immediate pressure to fundraise and accept less than favorable terms”.
Explaining the uncapped safe a bit more in the footnotes of the blogpost;
The $375,000 is on an uncapped safe with “Most Favored Nation” (MFN) terms. MFN means that this safe will take on the terms of the lowest cap safe (or other most favorable terms) that is issued between the start of the batch and the next equity round. Simply put, we’re giving the company money now but at terms you’ll negotiate with future investors
Breaking YC’s New Announcement Into Layman’s Terms
In understanding the announcement a bit more, we borrow from Ms Modupe Odele, Co-Founder, Vazi Legal, a US and Nigeria based law firm that works with innovative technology companies. She broke down the announcement in a series of tweets.
According to Ms Modupe; “An MFN SAFE is a SAFE with no Valuation Cap. and instead says, the investor gets the same terms that you give any subsequent investor. So essentially YC gets the most favourable terms any investor in your company POST YC gets”.
Different Schools of Thought About YC’s Announcement
School 1: Time to find more companies pre YC or actually doing the work of sourcing for startups which a lot of investors have left to YC. No more circling back after your accelerator interview because by that time the opportunity might not be available.
School 2: YC should have done this a long time ago so be grateful
YC has been backing startups for over 15 years and in that time, only 20% of the companies backed have failed so far. YC understand that beyond giving you their money, admission into the acceleration programme provides a seal that will help you raise even more money as you grow. YC also provides an incredible network of startup entrepreneurs, tech and marketing experts, and investors that a smart founder could leverage to succeed with their business.
School 3: International founders need to have a choice
Ms Moe Odele of VaziLegal is of the school of thought that International founders need to have a choice because of the uniqueness of their markets and the need to sometimes sign sweetheart deals with local investors.
In her words; “Local investors in Nigeria for instance are now open to writing bigger check sizes, we are actively seeing this. So yes it is possible to raise $500k locally and from angels. Now if you really want YC as an international founder, make sure to do this one thing.
Get all your angel checks and sign those docs BEFORE signing the MFN Safe with YC. It makes all the difference. Also get a lawyer to review the MFN Safe to make sure the clause is not retroactive (that it appears to future terms).
Understand that you can’t do sweetheart deals AFTER signing the YC MFN Safe unless you run the risk of major dilution.
In my opinion, this is problematic for international founders who often have to give sweetheart deals to local investors because they need those networks locally as they scale.
YC has created this deal to seal in its position – which is great. But to make it more equitable for most founders especially in line with YC’s ethos as being “founder friendly”, the additional $375k MFN Safe should be optional.
Founders especially international founders should be given the choice. $500k is a lot of money for run way but many founders from Africa are able to raise much more than that post YC. Locking them in like this with no choice isn’t ideal. the end”.
What school of thought do you fall into?