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Comment by tim333 | Hacker News Reader

I think its about 3% as the 7% gets diluted so approx $4.5bn for the assets. Of course a lot of that is illiquid and unrealised. The GAAP bottom line would be a lot less and not give a very accurate picture as it wouldn't include most of the gains.

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Their 7% stake has pro-rata and YC publicly states that it will follow-on to maintain that ownership up to $300m valuation.

The 7% ownership also allows YC Continuity to be more attractive to later stage companies. If YC already has a 7% stake, then it only needs to invest an additional post-money 13% in order to raise its ownership to 20%. A new firm coming to the cap table would want to invest 20% post-money. So, if the company doesn't need 20% capital, then YC Continuity has a significant advantage.

I think YC only fairly recently started exercising their pro-rata. IIRC there was a while before YC Continuity was started when they didn't have funds allocated for pro-rata. They've had it for a while now but I think they may have missed out on some of the earlier successes, like Dropbox, Airbnb and Stripe, which is where a lot of the gains have been realized at this point.

On the contrary - GAAP earnings give the most accurate picture of cold hard cash. That is the reason they exist , and securities regulators are specific about its definition.

Paper gains are notoriously easy to stretch.

Maybe but say YC put $20k into Airbnb for a stake now worth $1bn and $80k into 4 other statups that went bust. GAAP would show a net loss of $80k which would not reflect very accurately how they were doing. GAAP has been designed more to provide a consistent way of calculating corporate income tax than to accurately show how a company is doing.

You're welcome to suggest a more accurate way of consistently accounting income tax requirements.

That seems like an ungenerous interpretation of the parent's comment. I didn't take that comment to mean that GAAP is not a good way to calculate income tax, but that it's not a good way to judge the true financial prospects of a company.

I took it the same way. If there is a better way to judge the true financial prospects of a company we should be taxing them accordingly.

My point was that GAAP is probably the best we're going to do because of the consistency problems.

The moment you start applying special rules or caveats per company you stop being able to compare companies properly as an investor, at which point the measure becomes useless as a talking point as well as being useless for tax calculations.

My original post was framed against tax because it doesn't really make a difference. If the new method is good enough for comparison between companies it's good enough to replace GAAP - unless it's not.

It's actually an interesting question as to whether something different from GAAP should be used for tax. For companies based in one country it's a time honoured system that has worked for decades but for multinationals it's become in my opinion too easy for them to use loopholes and pay little or no tax.

Like with YC they are US based and if they sell their dropbox stake they'll be taxed but more tax avoiding companies might say have held the dropbox stake through a Cayman Islands trust or some such and try avoiding it. I'd vote for something like for multinationals they do accounts as if all their multinational bits were in one country and then allocate the earnings to different countries in proportion to the sales there. So if Microsoft had a lot of Windows sales in Germany say they'd pay tax on the profits there rather than saying they were all generated at a DVD stamping plant in Ireland for example.

I don't agree with this sentence at all, "If there is a better way to judge the true financial prospects of a company we should be taxing them accordingly."

The main thing investors want are some measures that are reasonably forward looking, with the caveat that some of those forward-looking measures will of course be inaccurate when the future comes.

Taxes, on the other hand, should be mostly past looking, taking into account events that are fully settled and guaranteed.

If, as an investor, you're only examining trailing metrics, you're going to be a pretty horrible investor.

Easy: they only realize taxable gains when the startups have a liquidity event -- ie go public or get acquired. (Or die, for the losses.)

No, that’s completely incorrect especially with new accounting standards. Cash flow is much harder to fake than earnings and new GAAP standards mix the two.

> Cash flow is much harder to fake than earnings

Unrealized gains on private, illiquid investments are neither earnings, nor cash flow.

My comment in relation to the comment that stated GAAP earnings are more sane. I think using GAAP as a standard for valuing an investment fund is a little asinine. Unrealized losses/gains yes, but GAAP doesn’t save you from mark to market. There’s a reason PE returns are smoother than public equities. Public PE firms wrote down assets way less than the decline in public equities in Q4. My problem with the new GAAP rules is that it distorts operating earnings and investment earnings. For example, when Stripe goes public, Amex will have fluctuating security in its earnings statement, or Booking and Ctrip, etc.

I'm under the impression that the IFRS (international accounting standard that replaces GAAP) changes this: equity instruments need to be measured at fair value, even if they have unrealized gains or losses.

https://www.iasplus.com/en/standards/ifrs/ifrs9

If I recall correctly, this prevents shenanigans where you over-represent the book value of assets that have lost value.

New GAAP Rules also mean you have to report unrealized capital gains (as of last year I think)

I'm not totally up on this but in the most recent Berkshire letter Buffett was saying they changed that for listed investments but not unlisted.

Their earlier stage companies certainly aren't doing 100%-compliant GAAP accounting -- it would be cost prohibitive.

Thus, YCs GAAP ownership numbers would be nebulous. They probably use funding round valuations as the proxy, and that's commonplace for VC funds.

Anyone valuing startups on GAAP earnings is an investor who will never invest in a startup. Appreciating it as a measure in this context is not a virtue.

Maybe less. They’ve sold off shares in secondary markets too. But still very impressive: more than a 10x return.

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