Y Combinator partners can no longer participate in the first $500k a company raises, unless it’s 3 weeks past Demo Day, according to a recent announcement. The reasoning provided is “other investors could treat investment by YC partners as an accurate sign of how promising [YC partners] thought a startup was.” The side-effect was it became “harder for the startups that partners didn’t invest in to raise money.” Maintaining good business ethics is also a possible reason for this revised policy. This change keeps fundraising fair for everybody.
Personal investments by YC partners in YC companies creates many potential conflicts-of-interest. Startup founders are already obligated to deal with YC partners as investors in a different capacity. Many of those founders don’t have any source for professional advice other than Y Combinator. Advice from Y Combinator to accept investments from its individual partners just doesn’t sound like fair dealing.
There’s also ethical concerns involving other investors. Y Combinator allowing its partners to invest prior to Demo Day is self-dealing, meaning those individuals get to invest at better terms than anybody else. Founders are also less needy to raise cash by Demo Day. One result is Demo Day investors potentially get worse terms than they might otherwise. Another result is YC partners get an easy return on their investment based on the higher valuation forced on Demo Day investors.
Y Combinator’s revised policy is the right thing for everybody. Offering more money to only some startups prior to Demo Day implies a lower opinion of the remaining companies. Y Combinator also now has at least 19 partners, several of whom are directly involved in other venture capital firms. This policy attempts to allow other investors to obtain similar terms as the Y Combinator partners. Ethical considerations like Y Combinator’s revised policy of personal investments in startups is good business.