Y Combinator Cap Table

Y Combinator or YC is a popular name in the startup ecosystem. What began as a startup accelerator initiative in 2005 is now a driving force in the industry. Y Combinator has seeded and mentored over two thousand companies to date. Drawing from this immense wealth of experiences, YC has also spearheaded breakthroughs in how startup business is done better and in a simpler manner. And recently, they have closed their Winter 2022 funding cycle.

Y Combinator

Startup operations are a race against time. Owing to limited budgets, startup founders have to take up many responsibilities at a time. They are typically multiple functional roles entangled into one. It is quite natural in this scenario that a startup team may not be equipped or skilled in every aspect of the business. Since the first 12 months determines a startup’s survival, the need for seed accelerator programs were recognized by the industry. Y Combinator is one of the best in this category.

What is Y Combinator?

Y Combinator is a California-based popular startup accelerator program founded by Paul Graham, Jessica Livingston, Robert Tappan Morris, and Trevor Blackwell. Over the years, YC has provided seed money, mentored, and launched thousands of startups across the globe. Though most of their participants are for-profit companies, YC encourages non-profit initiatives as well. Apart from supporting innovative startups, Y Combinator has also launched an investment instrument called the Y Combinator SAFE. 

As of January 2021, the cumulative valuation of the best YC graduate companies stands at more than $300B. Their flagship brands are Stripe, Airbnb, Cruise Automation, DoorDash, Coinbase, Instacart, Dropbox, Twitch, and Reddit. Some of their non-profit graduates are Watsi, Women Who Code, New Story, SIRUM, Zidisha, 80,000 Hours, and Our World in Data.

Y Combinator programs

• Accelerator program: Launched in 2005 at Silicon Valley, this was the first initiative of Y Combinator. It is a 3-month on-site intensive program focused on seed and early-stage venture startups. Some of the defining features of this program are:
  • Motto ‘Make Something People Want’.
  • Accepts two batches of startups a year (Jan-Mar & June-Aug).
  • Participants receive $150K seed money on graduation.
  • YC receives 7% equity in all participating startups.
  • Best industry-focused mentorship.
  • Best ‘demo day‘ where startups pitch their accelerated business to an ‘invite only’ group of investors.
• YC continuity fund: Launched in 2015, with this fund Y Combinator selects alumni companies with a valuation of less than $300M and makes pro-rata investments to support their growth.
• YC Research: This is a non-profit research initiative launched in 2015. It focuses on funding long-term research initiatives such as OpenAI.
• Others: Between 2017 and 2019, Y Combinator launched a series of programs to support and enable their growing ecosystem. These include the Startup School, Series-A program, YC Growth program, Work at a Startup, and YC China.

As we see, Y Combinator has diversified its initiatives over the years. These days it is a matter of prestige for a startup to have graduated from the YC accelerator program. Every year thousands of new businesses accepted in YC programs. Here is why.

Benefits of Y combinator

Y Combinator is one of the most successful seed money accelerator programs in the world. Their credibility is based not only on how their accelerator programs are structured but also on what happens after these startups graduate. YC supports its participants in these three distinct ways:

• Extensive community support: Since its inception, Y Combinator has successfully managed to keep its community of startup founders, mentors, investors, and alumni well connected and responsive. Here is how:
  • A strong alumni network of 3,000 companies and over 6,000 founders who are domain experts.
  • All YC alumni are part of Bookface, an interactive and exclusive platform with access to a private database of industry experts.
  • Most YC alumni get their first 40 – 50 customers/early adopters from this network.
  • Access to industry-specific email lists. It helps them get the best reliable feedback in the early stages.
• Best industry-specific advice: Y Combinator runs scheduled workshops, seminars, and conferences that help participants and alumni constantly learn, exchange ideas, and troubleshoot. YC also offers ‘office hours’ with domain experts. Participants join these on a regular schedule and discuss their challenges with fellow founders and industry experts.
• Startup Capital: Y Combinator financially supports startups in the following ways:
  • Participants pitch their business to an elite set of potential investors on ‘demo day’.
  • YC supports alumni companies with their ‘continuity fund’.
  • Access to discounts, free accounts, privilege services from companies of the YC network.
  • Support in raising Series A round – investor introductions, pitch deck design, term sheet negotiations, help in choosing the best offer.
  • Y Combinator SAFE – a special product to ease startup-investor deals.

Importance of Y Combinator Cap Table

Y Combinator has always tried to simplify the process of startup funding. As we see in the previous section, Y Combinator has launched thousands of startups across diverse industries over the years. Thus their take on startup funding is always driven by transparency and the ease of doing business. The same approach reflects on a Y Combinator cap table. 

At Series A round, a Y Combinator cap table does not crowd the document with unnecessary details. It contains simple information such as pre-money valuation, new money, SAFE money, Series A price per share, and the option pool. The cap table now reflects the dilution caused by these five factors. It is simple and easy to understand by all parties involved.

Convertible Note

Fundraising is an essential function of startup operations. But they have ever wondered how startups raise funds when they are only an idea or a product in the making? At this stage, company valuation is not possible as there is nothing much to base on. Then how should investors risk their funds into such companies? Convertible notes are the answer.

What is a convertible note?

A convertible note is a unique investment model adopted mostly by investors funding seed-stage startups who are not in a position to provide a company valuation. Though there is not much ground to evaluate the company at this stage, it is also a crucial point to have sufficient funds to scale up an idea. Hence, seed investors use convertible notes, which is practically a loan that eventually converts into equity at a milestone event in the later stages of the company. A convertible note calculator helps determine the actual value post-conversion. 

Thus investors of convertible notes are not interested in getting their principal money back. They profit from the startup’s success in making it to the Series A funding stage. This way, convertible notes work in favor of both the seed stage founders(who get money without company valuation) and investors(investment risks are nullified with a promise to future equity). Besides, convertible notes have provision for the following additional benefits at conversion:

• Discount rate: A discount investors will get post-money. Usually 10 – 35%.
• Valuation cap: This is a cap on the price at which notes convert to equity.
• Interest rate: This is a regular interest rate on the principal amount. It adds to the final value for conversion. This increases total shares. 
• Maturity date: The date when a startup must payback. It is usually set to a 12 – 36 month period.

These four benefits are offered in various combinations: interest-only, discount rate only, interest & cap, discount & cap, or all four together. It is best to use a convertible note calculator to arrive at the final value.

Benefits of a convertible note and when to use it?

A convertible note can be used to raise $100K to millions of dollars. Startups who are not in a position or want to delay company valuation yet need funds to keep their business rolling should use convertible notes. Some of their important benefits are:

• Founders do not share equity upfront. 
• Founders can take time in company valuation.
• Founders are not trading voting rights with this exchange – now or later
• Income assured for investors.
• Minimal documentation. A quick and straightforward process when compared to equity rounds.
• No need to provide any security in exchange for convertible notes.

Convertible Note Example

This is how the details of a simple convertible note look like. They carry basic information such as the name of the security holder, the principal amount invested, the interest rate applicable, if any, the valuation cap, and the discount rate.

Let’s assume two scenarios to see how the special provisions work out on a convertible note. Here the qualifying event is a Series A round of $10M. Let’s say the Angel investor owns a convertible note of $10,000. We will consider two options – a convertible note with a valuation cap and a convertible note with a discount option.

With valuation cap:

• Valuation cap: $5M
• Share price: $10 per share
• Thus the valuation cap will be at $10M/$5M = $5 per share
• Total shares on conversion will be $10,000*$5/$10 = 5,000 share

In case the same investor had entered directly at the Series A round, they would own $10,000/$10 = 1,000 shares only.

With discount:

Let’s say the investor was offered a 30% discount. This investor will be eligible for a share price of $7 instead of the actual $10. This way, the investor will gain $10,000/$7 = 1,428.57 shares on conversion instead of the usual 1,000 shares.

Y Combinator SAFE Note

Convertible notes, though a simple investment tool, can easily become cumbersome by including special provisions. Y Combinator has succeeded in simplifying this process. Leading from the concept of convertible notes, Y Combinator introduced an investment instrument known as the Y Combinator SAFE. Let’s take a closer look.

What is a Y Combinator SAFE Note?

SAFE or Simple Agreement for Future Equity is an investment instrument launched by Y Combinator in 2013. Y Combinator SAFE is a simplified convertible note. It carries only five pages with standard terms. This document is designed so that parties agreeing to it don’t have to negotiate many terms. SAFE allows only one discussion point – the valuation cap. Though SAFE is a convertible note, interest rates, maturity dates, and discounts are omitted. SAFE enables early-stage funding to be smooth, hassle-free, and flexible for the founders and investors. This allows new shareholders to invest in a company with SAFE notes attributing to a Y Combinator Cap Table.

Benefits of SAFE note and when to use it?

Y Combinator SAFE notes are best suited for unpriced seed rounds. Founders must know that SAFE does not require any collateral in exchange. In case an investor insists on it, founders should steer clear of it. Some of the stark advantages of SAFE notes are:

• Does not require company valuation.
• No maturity date, hence no risk of payment defaults.
• Only negotiating point is the valuation cap.
• Straight forward clauses covering exit scenarios, company dissolution, and change of control.
• Quick deal closure.
• On conversion, investors are paid back in the form of preferred shares.

How SAFE notes affect the cap table?

Y Combinator SAFE doesn’t visibly impact the cap table when issued. Their effect becomes pronounced only on conversion at a qualified finance event (QFE). Let’s understand this with a simple example.

Let’s say SAFE investor 1 invests $100K with a $2M valuation cap, and SAFE investor 2 invests $500K with a $10M valuation cap. Their ownership now stands as:

• SAFE investor 1: $100K/$2M = 5%
• SAFE investor 2: $500K/$10M = 5%

Their combined ownership in the startup is now 10%. This will not reflect now, but founders must know that they have already sold 10% of the company. Though the cap table will still show 100% ownership for founders, they actually own only 90% now.

Once the seed money enters, the next logical move in any startup is to hire good talent. This is when founders set aside a part of their shares as the ‘options pool’. For the first time, cap table dilution is visible at this stage. The cap table will now show founder shares post options pool and the total shares under the options pool as options issued and options available. The 10% SAFE investor shares are still hidden.

After a few months of operations, the startup will next attempt a priced round – Series A. This is the QFE for SAFEs. Besides, at this stage, the lead investors normally demand expanding the options pool pre-money. Once this money comes in, SAFE’s impact on a cap table is clearly visible. The revised cap table will now reflect:

• Founder shares (diluted by SAFE, options pool, new money)
• Options issued
• Options available (after on-demand expansion by Series-A investor)
• SAFE investor 1 (preferred shares post-dilution by new money and expanded options pool)
• SAFE investor 2 ((preferred shares post-dilution by new money and expanded options pool)
• Lead investor shares
• Other Series A investor shares

Y Combinator Safe Note Example

Here is a closer look at the Y Combinator SAFE document. Deriving from years of experience in launching startups with sufficient funding backup, Y combinator has designed this standard document. This is readily available for startup founders when they are prepared to raise funds.

As we see, a Y Combinator SAFE is only five pages long and has five distinct sections:

• Events: This section covers all clauses founders and investors will ever need in their engagement. In case of conflict at any point during the course of SAFE, both parties can simply refer to this section for clarifications. This covers clauses for:
  • Equity financing (all details covering conversion to equity).
  • Liquidity
  • Dissolution
  • Priority payouts at liquidation
  • Termination
• Definitions: This section carries definitions of all terminologies used in SAFE.

The first two sections make up the first three pages of the Y Combinator SAFE. This covers pretty much all the important ‘negotiating’ points. The last two pages cover:

• Company representation: Basic details of the startup.
• Investor representation: Basic details of the investor.
• Legal: Legal disclaimers.

Eqvista Convertible Note Calculator

As we see, convertible notes can be modified and used in various forms. Thus one must be mindful of the conversion calculations during the startup’s first priced round. This can be challenging if done manually. Eqvista is a sophisticated equity management software that has an in-built convertible note calculator. Eqvista accommodates three types of convertible notes:

• Standard note: One that has provisions for interest rate, discount rate, valuation cap, and a maturity date in various combinations.
• SAFE: Y Combinator SAFE where the only point of negotiation is the valuation cap.
• KISS: Keep It Simple Security or KISS was launched by 500 Startups. Negotiating points – valuation cap and discount rate.

Here is a closer look at how the Eqvista convertible note calculator works.

This section includes the inputs of the company’s pre-money valuation, new investment (SAFE note), and post-money option pool if any.

After inputting the numbers, the Round Model will run the calculations to find how much dilution occurs and the ownership% each shareholder will receive after the new investment.

Eqvista software is one of the market leaders in offering integrated equity management solutions. Startup founders have access to all their cap table-related needs on one platform. As we see here, the convertible note calculator automatically integrates round modeling to give an overview of how the notes will convert on dilution. This is an added benefit as founders need not employ additional resources to visualize the overall effect of dilution on their ownership structure.

In this example, only the basic details such as pre-money valuation, post-money option pool, and investment amount are entered, followed by who owns how much. Further, Eqvista automatically calculates how the new money will affect the ownership of all shareholders.

Some of its key benefits are:

• Allows to test multiple dilution scenarios
• Accommodates pre-money and post-money conversions
• Provides convertible rate options for preferred shares
• Provides interest rate options for convertible notes
• Provides pictorial representations – graphs for new investments
• Immediate output for new data

Manage Your Cap Table Efficiently on Eqvista

Y Combinator cap tables are not as simple as they might seem in the initial stages. Investment tools like convertible notes, Y Combinator SAFE, and KISS require a careful approach to cap table dilution right from the seed-stage funding rounds. It is best to automate the process using efficient software like Eqvista. Check out our pricing on our cap table and 409a valuations. Contact us today or sign up free.