Y Combinator change could impact how other accelerators fund startups

December 9, 2013

y combinator 1024x538 Y Combinator change could impact how other accelerators fund startups

Y Combinator continues to lead in the accelerator world

Y Combinator aims to make it easier for startups that go through its accelerator to raise seed money with the launch of Safe, which refers to “a simple agreement for future equity.” The investment instrument spins off of convertible equity notes that many startups use during the beginning stages of raising money from investors. With Safe, companies can quickly raise money from investors with the promise of future equity in the company without having to worry about maturity dates, accrued interest or the need to hire a lawyer for negotiations.

Read also: The startup ecosystem is going through Demo Day burnout

Y Combinator did issue convertible equity notes in the past, but the process became problematic on multiple levels. When the notes are issued, they typically mature in one year; this may seem like a lot of time, but for a company in the beginning stages of fundraising and planning, that can go by pretty quickly and founders may not have bandwidth yet to deal with at that point in time.

Advertise at AG

Additionally, the issuance of convertible notes requires startups to constantly calculate the amount of accrued interest the company owes on the debt that it issued. By switching to a model that focuses more on equity, rather than a short term loan that is often done with a convertible note, some of that hassle goes away.

Beginning next year, Safe goes into effect

“In the securities world, there’s debt and there’s equity,” said Y Combinator partner Carolynn Levy. “But if everyone wants to own equity in a company, why would you use debt as an investment instrument?” By issuing Safe through the use of open source documents, the startups in the Y Combinator program can quickly issue equity to investors and forgo some of the hassles that pop up once convertible notes mature.

Y Combinator will begin using safe with the startups enrolled in its Winter 2014 class.

Destiny Bennett is a journalist who has earned double communications' degrees in Journalism and Public Relations, as well as a certification in Business from The University of Texas at Austin. She has written stories for AustinWoman Magazine as well as various University of Texas publications and enjoys the art of telling a story. Her interests include finance, technology, social media...and watching HGTV religiously.

Weigh in...