Y Combinator is making some big changes today with its equity structure and YCVC program. The incubator will now end its YCVC partnership with Khosla, Andreessen Horowitz, General Catalyst, and Maverick Capital, and has raised an undisclosed amount of funding from LPs to invest more money in the startups graduating from the program.
YC will now invest $120K for 7 percent, compared to the previous structure, which put in an average $17K for 7 percent, plus a “safe” that’s converted at the terms of the next money raised for another $80K.
The investment will come in two chunks, which together will represent a flat 7 percent of the company, says newly appointed YC head Sam Altman. He explains that while YC itself continues to have no LPs, a portion of the investment in startups is from a fund YC manages that does have LPs. We’re told LPs are traditional LPs like university endowments, and sources tell us that there was no shortage of demand from the LP world to back YC.
For background, in 2011 Yuri Milner and SV Angel started offering $150,000 to every startup YC invested in on an uncapped convertible note. The firm renamed this YCVC, and changed a few of the details, including swapping out VC firms, and reducing the amount to $80K on top of $17K. This was because the $150K was starting to cause problems for founders, especially in breakups. In the last round of YCVC, Andreessen Horowitz, General Catalyst, Maverick Capital, and Khosla Ventures all participated in the fund. As Dan Primack reported a few weeks ago, YC started to rethink this deal.
One of the reasons to end this deal was signaling risk: If a YCVC investor did not make a follow-on investment in a company, this caused some other investors to think the company may not be a worthwhile investment. As Altman explains, this caused complications. “We hate complication, and we hate anything that causes issues for our startups, even if it’s just an issue of perception. This should help level the playing field.”
The structure of the new funding is also meant to be simple — there is a flat $120K for 7 percent equity, regardless of the number of founders. And for non-profits, Teespring will give each non-profit that YC funds $50K, which is on top of the $50K given by the incubator.
Why $120K for startups? Altman says that the cost of living in the Bay Area has gone up significantly, and the aim is to give founders enough money to run their business and pay their living expenses for at least six months or longer. Altman tells us that YC will still work closely with many of the venture firms that were part of YCVC. For example, these investors will be included on any notes sent to investors informing them of when startups are looking to raise prior to demo day.
Altman says the $120K number could be adjusted if it proves to be not enough for founders, and he anticipates more startups being accepted into the program in the next semesters. The last class had 68 for-profit founders.
He also commented on how YC has been focused on attracting founders. The accelerator has been visiting colleges for recruiting, and has also set its sights on international markets, as well. The last class had founders from 22 different countries, he adds.