Fascinating read. Thank you for this. Reminds me of a piece Jamie Zawinski did a few years ago[0][1] regarding a similar issue relating to VC's and "your one and only youth." [2]
The post was flagged by users and vouched for by other users. I think a moderator unkilled it at one point, but other than that no one here has touched it (or read it).
Regardless of whether this is right or wrong it's a good reminder that you should always apply critical thinking and skepticism to everything you read or hear, even if it's from people that you respect like Paul Graham. Everyone is human and our flaws are many.
My main thought as someone who was an early stage employee at some high tech startups in the Silicon Valley in the 1990's, is that to the extent there is some truth in the poster's "three class society" of investors, founders, and mere employee engineers and I think there is, this was often true in the 1990's and is nothing new invented by Y-Combinator or other newer firms.
Often in a successful startup (most failed) in the 1990's, the venture capitalists or other investors seemed to walk away with the lion's share of the money from the acquisition or IPO, the founders and perhaps a few other key insiders would make several millions, and the "run of the mill" engineers would get a few hundred thousand dollars if they actually lasted the four year vesting period of the stock options. Many seemed to leave or be pushed out before the four year vesting period.
I would draw a distinction between a typical successful startup that might be acquired or IPO for about one hundred million dollars and what today would be called a "unicorn," a rare super-successful startup that might sell for a billion or more. In a unicorn, some early stage "run of the mill" engineers or for that matter janitors can sometimes come away with millions, set for life, but this is not typical of successful startups then or now.
The way I see it is that YCombinator provides a service: Advice and access to relatively small amounts of money. It is taking a cut too. This service is in competition with other ways of doing things. And at the moment it is successful so people opting and paying at times dearly for it still go for it again and again.
It is easy to criticizes a solution and blame the solution for the forces that shaped it. In the past where there was no YC if and only if you got funding maybe you ended up with a larger cut. Maybe, maybe not. Often professional third party capital came later. Also there were less standard processes and a more asymmetric information so probably the outliers were larger. There is a surviver bias when looking back.
YC deals in part with other peoples money (OPM) and that in general lead to attracting players strongly financially motivated with less technical skills and putting them at the top. Building a technical business from scratch requires technical investment on the ground level and leaves more equity for the technical guys.
So why has the route to get early funding through YC become so popular? I believe a factor is the general problem in the society of capital formation in the middle income layer of the society. In the past students left the university without debt - today they and their parents often are under water. Getting access to the initial capital has become harder and access to financing through third parties thus more important.
It will be interesting what Kickstarter does to the YC business. I guess YC has to compete more strongly on the services side.
[0]: https://www.jwz.org/gruntle/nscpdorm.html
[1]: https://www.jwz.org/blog/2011/11/watch-a-vc-use-my-name-to-s...
[2]: https://www.youtube.com/watch?v=4Q7FTjhvZ7Y