The Valuation Boost Needed to Justify YC | Hacker News Reader

The Valuation Boost Needed to Justify YC

blog.yesgraph.com

31 pointsivankirigin19 comments

In the company A&B example, you're calculating the post-money valuation required to maintain your equity as a percent... but not in terms of the equity's value. The founders' 87.51% is vastly more valuable for Company B (85.7% of $11.7M = $10M) compared to Company A (85.7% of $6M = $5.1M).

If you're concerned with value, then the % you own is not the only key factor. I.e. 10% of a $1B company is more valuable than 50% of a $100M company. PG's equity equation (the source of 1/(1-n)) deals with value: http://paulgraham.com/equity.html

At some point the nasty matter of 'control' will rear its head and you might regret selling any shares early on. Some shares may turn out to be much more valuable than you ever thought they would be.

Control is a separate concern that could (indeed) play into how you "justify YC".

I'm just saying: If you use "dollar-value of equity" as the metric to justify YC, OP's calculations are wrong. If you use "percent ownership", then it's fine.

What I'm getting at, in case it isn't clear that in the end those few shares that you sold cheap can come back to haunt you in later years. So dilute if you have to or want to but be very careful about the terms.

My hunch is that there are worse initial 7% equity holders than YC should control become an issue down the road...which is to say I haven't read about YC screwing people over control, not that founders have nit perceived such actions.

Absolutely but the next round or the one after that might push you over the 50 border and it need not be YC that does the screwing, that could easily be a later investor.

At successful startups, the board controls the company and the founders control the board. Equity mostly a separate issue.

Of course. I guess there might be soft advantages from YC's participation that reduce the probability of getting into a bad situation, e.g. access to investors less likely to throw founders overboard and a network which may make questionable investor behavior higher profile.

That is probably a really nice side effect, something akin to a vaccination. Excellent observation.

Investors would think twice about "screwing" a YC backed company. PG has clearly stated that they would blacklist VCs for various not-so-ethical practices.

Actually, money losing companies are controlled by their investors, and companies that make money are controlled by management.

This is a pragmatic truth that stems from board dynamics, personal risk tradeoffs for investors, etc. Most of the fears around ownership percentage, board seats, etc, are misplaced.

The two companies are different in lots of ways, this being one of them. We're not disagreeing. You simply rephrased my point that the company needs to be this valuable to match the dilution.

And thanks for finding that PG post, it influenced the thinking here. At the end of the post, we come to the same conclusion: YC is worth it if it makes your company more likely to succeed.

The important point Ivan makes here is that the real question is "will YC increase the probability that my company will succeed." This is different from the "how much will YC increase my valuation." I get this question a lot, and I generally encourage founders to re-frame the question to consider this distinction.

Way to give away the ending :)

Your startup Rickshaw shares with YesGraph that are customers are people that make apps. (and for those that don't know, both Divya and I went through YC twice). How much did that influence your decision to go again?

Your valuation fails the simplest fundamental, which is the share % of what the VC will get after the seed round.

In VC logic, they will be getting around 14,3% for the same amount of money than they would get by giving the same 1 million for almost half the value.

In multiple dilutions at inflated figures and the "A" round where the lead VC grabs 30% (no matter how much money they give), the seed guy stands to be the biggest loser.

From the perspective of a self-serving VC, he/she stands a greater chance of vetting a company at 14,3%, giving him the opportunity to maximize return down the line, as the dilutions will not shrink by almost half (as would under your logic through YC).

However, if that VC believes in vetting a "YC-company" over his/her own ability to pick a winner, then that VC should probably not be in the startup-investing market in the first place.

You're describing what is actually going on in the real world. VCs are competing at Demo Day and valuations rise. Some think it is too expensive and avoid it.

1 on 11 isn't as realistic, because the VC would compete by wanting to put in more money. So 3 on 11 to 3 on 30.

The point of this post is to illustrate the math, but most importantly the second half is to show that this math isn't quite the right way to look at it. It is instructive to those that don't know much about this stuff.

I don't think a more complicated scenario would help explain this. For example, I left out option pools.

I should update the post with more about why we did YC, but i'll have a follow up post shortly. In short, we're developer facing, and the YC batchmates are great beta testers. Plus the advice is stellar.

Few startups choose between $1M and getting into YC, so how does this make sense? It seems like a better comparison would be raising $120k from an individual angel investor.

This post is for people that have the choice that are trying to decide whether to do it. I think they should, but I often see people getting the math wrong.

Especially because YC is getting so good that companies that have a choice of raising a seed and doing YC are getting in. They delay the seed till demo day.

YesGraph raised a $1M seed right before YC, so I have personal experience here.

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