ycombinator, term-sheetMight be wrong, but the current standard deal at YC appears to be based on the assumption that it’s their position that the costs to implement the terms of the agreement are equal to the sum of the funds offered.
What are the common types of costs related to implementing the terms of the agreement, what is average amount that these costs might be expected to be per team member and/or team if a fixed costs per team, and how were these estimates reached?
YC is not an investment firm, they are a business accelerator/incubator focusing on technology companies. A business incubator is a business which helps startups get started in return for a fee. In the case of YC, the fee is equity in the startup. The service they offer include cash (call it an investment but its actually designed to cover the living cost of the founders while they are getting their startup running), business planning, business lessons, networking,pitching, showcasing to investors, PR, helping with research and product development and market traction etc.
The startup would not be making an income in the early stage and the founder has to be working fulltime on it. The ‘investment’ is primarily designed to cover the living costs of the founder while he is building his start up and attending the incubator program. These can be normal living costs in the area where the incubator is located. This can be rent, utilities, groceries, health, transportation etc. The YC deal is the same regardless of the number of founders. You can use a calculator like the one here to compare the costs of living in the Bay Area to your own area http://www.payscale.com/cost-of-living-calculator/California-San-Francisco
Since you have to give up equity, it would be worthwhile to assess what the future value of that equity might be. The YC standard deal takes 7% ownership of your startup. This is a significant portion of equity and 120k is not a big sum of money. YC plays it very safe by spreading a small investment over a large number of companies. Even if 1 out of 10,000 of the companies they invest in turns out to be big like the next facebook, they would be making significant return on their investment.
For example, 120k (current standard YC deal) x 10,000 companies = they are out 1.2 billion diversified over 10,000 companies. Assuming dilution of 7% to 1% as further rounds of investment happens. Taking FB as an example, with current market cap at 226B. 1% would be 2.2 B.
Keep in mind that this is likely to be series A preferred stock and their term sheet would give them the right to buy any new stock prorata as well. If your startup hits big like facebook and YC’s 7% got diluted down to 0.1%, you could potentially be giving up $226 million in exchange for $120,000 and some services.
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