1. A convertible note, however favorable its terms, is still fundamentally a loan. This means it will have a due date at which the holder may demand payment unless the amounts due have been converted into equity before then.
2. Item 1 in turn means that there will be no coasting for the YC companies upon receipt of this money or even necessarily a break from the pressure of fundraising. Why? Because the investment is not from a relative who is looking to get a high-interest-rate return on his investment but rather from a venture investor who fully expects that the company will make a good-faith effort to raise funds as appropriate to meet the minimum funding threshold at which his note will convert into equity. That means there will be considerable pressure to do a Series A round within the term of a typical note of this type, which means within the first 9 months.
3. What this money does then, in my view, is strengthen the negotiating leverage of the YC companies in terms of getting further bridge funding to carry them out to Series A. They won't need to worry about survival money during their first steps and they can in turn be more selective about whom to talk to and what terms to consider in taking further bridge money for their early build-out.
4. The terms of these notes will undoubtedly have provisions covering what happens if the startup is acquired before a triggering event for the note conversion. Those terms might vary widely but my guess is that they will be such as to motivate the founders to push for funding so as to effect a conversion. There is nothing wrong with an investor building in reasonable safeguards to make sure he doesn't get abused and the safeguards here might be such as to make it unattractive for the founders to exit via M&A prior to conversion, which again means that there will be great pressure to get the larger funding.
The biggest impact here will be on those investors competing for early deal-flow and on what should be a broader pool of applicants who can now seek to go the YC direction. I doubt that it will relieve the fund-raising rigors of the YC companies themselves very much, if at all.
1. A convertible note, however favorable its terms, is still fundamentally a loan. This means it will have a due date at which the holder may demand payment unless the amounts due have been converted into equity before then.
2. Item 1 in turn means that there will be no coasting for the YC companies upon receipt of this money or even necessarily a break from the pressure of fundraising. Why? Because the investment is not from a relative who is looking to get a high-interest-rate return on his investment but rather from a venture investor who fully expects that the company will make a good-faith effort to raise funds as appropriate to meet the minimum funding threshold at which his note will convert into equity. That means there will be considerable pressure to do a Series A round within the term of a typical note of this type, which means within the first 9 months.
3. What this money does then, in my view, is strengthen the negotiating leverage of the YC companies in terms of getting further bridge funding to carry them out to Series A. They won't need to worry about survival money during their first steps and they can in turn be more selective about whom to talk to and what terms to consider in taking further bridge money for their early build-out.
4. The terms of these notes will undoubtedly have provisions covering what happens if the startup is acquired before a triggering event for the note conversion. Those terms might vary widely but my guess is that they will be such as to motivate the founders to push for funding so as to effect a conversion. There is nothing wrong with an investor building in reasonable safeguards to make sure he doesn't get abused and the safeguards here might be such as to make it unattractive for the founders to exit via M&A prior to conversion, which again means that there will be great pressure to get the larger funding.
The biggest impact here will be on those investors competing for early deal-flow and on what should be a broader pool of applicants who can now seek to go the YC direction. I doubt that it will relieve the fund-raising rigors of the YC companies themselves very much, if at all.