Today’s tweet thread is about the ins and outs of the new @ycombinator deal.

What is it? How will it impact founders? How will it impact other investors?

Read on >>

2) In this new offer, although YC is offering more cash as part of it, this deal shouldn’t be conflated with a $500k for 7% offer. This is not the same.

3) The right way to think about it is that YC is making 2 offers. *Both* need to be accepted in order to go to YC.

$125k for 7%
$375k at an uncapped SAFE with an MFN

4) Everyone understands the first one — that’s how the old deal was.

The second one *feels* like a good deal and free money. But it can be quite expensive depending on the circumstances.

5) The MFN (most favored nation) clause means that YC will get to invest $375k at the same terms as the investor who has the best terms.

So in the past, many YC companies would raise a small amount of money from angels at better terms pre-Demo Day than post-Demo Day.

6) So in the past, you might raise $100k-$200k at say $6m-$8m post money valuation ahead of Demo Day to bring in smaller checks: angels and microfunds who are more valuation sensitive.

7) This would’ve been maybe 3% dilution — or less even.

Now if you brought in say an angel for $10k at $6m post money valuation, YC would also invest $375k at $6m post.

So instead of 0.1% dilution, you’d now take an additional 6% dilution!

9) Now if you are doing your full raise at a high cap — say $20m post money, then $375k is insignificant.

This encourages founders to only raise high valuation money. This is great if you have your pick of investors.

But you don’t know what will happen to your raise.

10) In particular, I think this will affect international founders more than US founders.

There are often fewer choices locally for raising $500k.

But for int’l founders, it’s often more impt to get *more* not fewer US investors around the table to help w/ network.

11) Most investors are also not willing to pay such high valuations for international companies. That’s just the reality of it — the exit potentially is seen as much lower or the geography is “out of realm”.

So there’s a smaller supply of intl investors.

12) Just in general, we are now in a world where there are now a lot of angels, syndicates, microfunds. Collaborative rounds are often strategic and good for network for many founders.

This discourages that.

13) But this makes sense for YC because their model is working well, international is a big part of their strategy, and this is a way to lock out would-be competition.

14) I think what ends up happening is that savvy founders who recognize this will see this offer as a good way to get set up to raise large rounds from traditionally series A investors.

15) However, given the large batch sizes, not all founders will be able to do this. A lot of founders will not be successful in raising these kinds of large rounds from larger institutionals.

16) Obviously I’m biased, but I think if founders want smaller checks from operators / microfunds / angels / et al around the table, they’ll have to raise those *before* YC or not at all.

Just my $0.02