Good article, but you're wasting your breath. Sarah Lacy's article had such little substance and thought behind it that pointing out the errors in it is like picking apart scientology.
6% is 1-3 rock stars --- your best lead developer, your CEO. It only seems small when you're just getting started. It's a very significant amount of equity. Yes, companies trade 40+% for VC all the time. But they're also buying a guaranteed 2 year runway and a war chest to offer those same rock stars 150k-200k in year 1.
I'm not making a value judgement here --- maybe YC is worth that much for you.
(I read the article, I know "6%" isn't really the point here; it's just the one nit I have with the discussion.)
I don't think 6% will get you 1-3 "rock stars" at the stage that most YC companies are. Much too early for that.
At that stage (where cash compensation is minimal if not non-existent), the equity that would need to be given a real "rock star" would be considerably higher.
You're right, but what does that matter? When you give up 6% of your company in 2008, you're out that 6% in 2009. In 2008, a CEO costs 33% of the founder's pool. When the company survives into its first cash-flow-neutral year, that CEO costs much less.
The idea that you can just keep peeling 6% (or 40%) every round is also a fallacy. You can keep doing that exactly until the point where your shareholders stop letting you do it.
Again: it's really easy to devise an argument that says a YC endorsement is worth 6%. I'm not going there. I'm just asking you to think about the real value of that equity number, and I'm doing that because I think to a lot of people, 6% sounds low. I had less than 2% of a very small company that got acquired in '98, and I ended that year just shy of 7 figures.
It matters a lot. 6% of a company in the idea stage is worth a lot less than 6% of a company that's been in motion for a year. Earlier stage = more risk = less value. It's that simple.
If a company in the idea stage were to hire a rock star, they'd almost always need to give way more than 1 or 2%. A company that's already gone through YC and/or done an angel round might give away that little.
And even then, bringing on a CEO would be way more. You wouldn't want a CEO to only get 1 or 2% equity.
You're obviously right. I've just had the experience of wishing I had that kind of equity to throw around. I'm "arguing" a point you didn't really make --- is YC worth 6%? I don't know. But I do know that it's more significant than it might sound.
Well, like PG says, it only has to increase your expectation by 6.4%. For some people, it probably would not. Early paypal employees, people with other successes, etc, have unlimited access to funding/capital.
I would say that for most first timer's though, it's a clear win. If nothing else, PG's guidance probably saves you from well more than 6% wasted equity later on.
