It is a statement that we believe investing in YC companies at post-YC valuations is still a great deal.
"we believe investing in YC companies at post-YC valuations is still a great deal"
but also says this (from the post):
"And by doing this in every YC company, there will be no signaling issue of us supporting some companies and not others."
So how can you have both statements be true?
In other words how can you say "still a great deal" and also acknowledge that you are investing in all companies, not only ones that are a "great deal", simply so there is no signaling?
I can see how this could easily turn out in YC's favor. For one, the really obvious failures often flame out during YC itself and fail to raise follow-up funding, and so YC wouldn't have any obligation there anyways. And the really big successes become worth far more than $250M, enough to subsidize many failures.
The big question for me is what it does to incentive alignment - it seems like YC now has an incentive to ensure that companies it doesn't like don't raise follow-up funds, as well as incentives to get lower valuations on the early funding rounds. It also in theory should make them pickier about their application process, knowing they're committed to participating in any follow-up rounds. On the plus side, they have an incentive to ensure that promising startups do raise follow-up funding (rather than go out of business), it avoids some of their misaligned incentives relative to the rest of the investment community, and they have an incentive to keep helping their investments later in life.
YC already has incentive to do this; their post-dilution stake in wildly successful companies still shakes out as being far from trivial.
That said, it would certainly be fair to say that these changes probably do serve to strengthen existing incentives.
Let's look at a company who takes $120k from YC in exchange for 7% equity. On demo day they get term sheets for (A) $10mm at a $20mm post-money valuation, and (B) $10mm at a $250mm post-money valuation
In either case the pro-rata vehicle has to take down $700k of the $10mm to keep the 7%. As long as the pre-demo day and post demo-day money are coming from the same fund, it's all good
But let's say the terms sheets are: (C) $10mm at a $250mm post-money valuation, and (D) $50mm at a $250mm post-money valuation
Term sheet (C) requires the same $700k, but term sheet (D) means YC has to shell out $3.5mm.
If you're less than excited about this particular company, would you be more likely to mention that "$10mm is plenty of cash and term sheet (C) lets the founders maintain far more equity"?
I doubt it. And conflicts of interest don't necessarily cause problems. But, this clearly going to cause friction at some point.