I have heard Delaware and C Corp, but I wanted to know how YC does it.
Short answer. If you might eventually want outside investment or to go public or to have a lot of employees with stock options, you should be a corporation, though you can elect to be an S corp at first (as opposed to a C corp). If you never plan on doing any of this, you might want to be an LLC because it is easier to deal with. If you are only going to be in one state, it is easiest to just create the legal entity there.
One thing I didn't realize when researching these corp types: an S-corp converts to a C-corp automatically as soon as they take outside investment (outside investment = preferred shares. In theory, they can issue common and keep their S-election). There's no additional legal paperwork required, and no complicated reincorporation. That makes S-corps fairly attractive to businesses that might want to take outside investment if they take off, but have no idea if they're going to take off.