[bmelton]

But if we offer a free alternative with equivalent benefits

That's the thing - you don't. Using the Coke analogy, YCombinator gives me a Coke, but asks that I share 6% of it back to them.

You want to charge me $200 for the Coke, which I can supposedly make back with endorsements, or recommendations, or 'engagement' somehow, but you're still charging $200. That it CAN be free, doesn't mean that it is.

Spelled out more obviously, ignoring travel costs and all incidentals, if I get in to MassChallenge and it doesn't get any traction, I'm out $200.

If I make it in to YCombinator and it doesn't get any traction, I'm out nothing. Also, YCombinator doesn't make any money off of me. They only get 6% IF I SUCCEED, which means that they really want to leverage their connections so that I do.

You might consider not taking equity as somehow more generous, but it's just a different strategy. I would rather you took equity on the backend than $200 on the frontend, because that assures me that you'll want to help me succeed.

[WarPaul]

What does the 6% on the back end do to your valuation in later rounds? Assuming you do expect to take on more growth capital upon successful completion of YC. Not very much Coke left to enjoy after that...

[bmelton]

I think you're misunderstanding valuation -- valuation represents the potential revenue of a company. Who owns how much of it generally doesn't affect a company's valuation though, in the case of YC (or others known to be successful), it almost certainly chips the valuation up, due to the value add.

Who holds issuances of common stock isn't generally something that will negatively affect a valuation.

[WarPaul]

Valuation is also based on the prior investment to equity ratio. How much money is invested in X startup for 6% equity? That would certainly effect the pre on any term sheet, no?

[bmelton]

That depends on so many factors really, but it's common to see money go into an option pool (that dilutes everybody's stock) as well as a fixed percentage go into the pool (which dilutes YC shares as well) -- meaning that if Sequoia comes in afterward and takes 20%, it dilutes the ownership shares that I have, as well as the ownership stake YC has.

The important bit is that they're in it just like the founders are -- if the founders get diluted, YC gets diluted. If the founders go broke, YC goes broke. If the founders make money on an exit, or a liquidity event, then so does YC.

You can argue all day long about 6% being 'greedy', or 'predatory' or whatever you like, but from what I understand, the value they add far exceeds the amount they take, and means that they're invested in your success.

[WarPaul]

I don't see YC's 6% as being greedy or predatory at all. It's just different economic theory.

What PG did with YC is LEGENDARY. He was the first and will go down in history as one of the most pivotal figures in the entrepreneurial economy. The best explanation I've heard on YC's value add (or TechStars, etc.), is that it's like bringing on another co-founder, which makes perfect sense - as does your explanation above.

Looking forward to seeing future entrepreneurs continue to benefit from great program's like YC, TechStars, MC, etc.

[scbailey]

No one has mentioned that you can be a part of YC and still apply to MassChallenge. Why not do both and get even farther ahead? MC doesn't require you to be in Boston, so it's in your interest to place multiple bets.

[bmelton]

That has been mentioned actually, and there are requirements to be in Boston for some parts of MassChallenge.