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Sharing Stake for More than Cash

17 Sep 2009

Fred Wilson describes the value YCombinator brings to a fledgling business, calling it the best deal in startup land. When you think about sharing stake in your business for cash or other value, the equation is simple. At the time of the deal: Is it a net gain to trade shares for overall business strength? Investor cash acts as a catalyst to the growth of startups. But there are downsides to giving up equity, in fact Felix Dennis strongly suggests we avoid it all costs! There are long term ramifications to continually eroding your holdings within a business, but as long as the overall value of your remaining shares is greater than predeal, it's a win win.

I added to a few other great comments on Fred's post but here's my main response to the post:

Before I really dug into what YC provided I sided with Sarah. 6% for 25k seemed like a bum deal, and I don't think any startup should consider something as weak as that offer. But when it comes to the connections, education, mindset and shared stake the 25k really is the much smaller part of the 6% exchange.

I think about stake/ownership much differently now than I did a few months ago. Now sharing ownership means building a network of folks that all push for the success of the business. No man is an island, and there's no reason you have to build a fantastic company on your own.

The long term value of the business you're building will increase by much more than the equity you split. I'd much rather own 8-10% of a 10 million dollar business, than 100% of nothing ;)

For some background, there was a great debate on HackerNews about YCombinators competition and deal. Under this comment tree, I added some feed back:

Maybe because I'm a little older I'm confused on this one Paul. Why so much competition for 20k? Why are young founders racing to give away up to 10% of their business for such a small amount of capital? I can see the value of the YC network and that's worth a lot to me right now. But rent and fast food money for 3 months seems a little low of a reward on "winning" applications. Is the success rate of YC founders low? (success measured as sustainable/viable business in 5 years or a liquidity event)

What I discovered is feedback directly from YCombinator startups that applauded the value they received from Paul and his team. In particular this from Jamie Quint:

YC for us was much more about the connections than the money. It makes getting in the door a lot of places much easier, VCs/Angels are big on referrals and YC is kind of an insta-referral to anyone you want to talk to.
The value of YC also depends largely on what kind of company you want to start. If you're looking to start a small shop making $500k-$2M (max) a year in revenue with 2-3 people than YC probably isn't for you because that type of business is not venture fundable and thus the venture connections that YC can get you aren't really worth much. However, if you're looking at something that has the potential to be VC backed scale ($10M/yr+ at some point in the future) then the introductions and connections are necessary and the value of YC is clear.
Also, I would add that I think the YC alumni network has become one of the most valuable parts of YC. There are enough alums now that basically someone has had experience with what you are going through and can offer good advice, imho that is the hardest thing about YC to duplicate.

Who could better judge the value of the deal, than the startups that work with YCombinator?

TC50 and Paul Graham from sarah lacy on Vimeo.

Paul makes quite a few great comments in agreement with Steve Blank's continued message of launch early and learn about what the users want. Towards the end of the video Paul makes mention of monetization plans, "if (investors) are smitten with you, they don't ask".

My take away: The ideal startup will have both a monetization plan, and investors that trust the founders and are excited about the product. First and foremost for entrepreneurs is building value for customers/users and loving every step of the business growing process.