What is Y Combinator's Standard Deal?

No problem, I'm quite familiar with this. Many people get a bit confused when they first encounter YC's terms, but if we break it down, it's actually quite simple.

Simply put, YC's Standard Deal is now a "package deal," providing you with a total of $500,000. However, this $500,000 is divided into two parts, with completely different natures:

Part One: $125,000 for 7% Equity

This part is the most straightforward and easiest to understand.

You receive: $125,000 in cash.
YC receives: 7% equity in your company.

You can imagine it as you've made a large pizza (your company), YC gives you some money, and then takes 7% of that pizza. This money is real, given directly to you, in exchange for 7% of your company's shares. This part is very direct, no tricks involved.

This transaction also indirectly sets a very early valuation for your company, approximately $1.78 million ($125,000 / 7% ≈ $1,785,714).

Part Two: $375,000 Most-Favored-Nation (MFN) Investment Intent

This part is a bit more complex, and where many people get confused.

You receive: $375,000 in cash.
YC receives: something called an MFN SAFE.

Let's break down what this means:

What is SAFE? SAFE stands for "Simple Agreement for Future Equity." Don't be intimidated by the name; you can simply think of it as a "future equity voucher." YC gives you this $375,000 first, but doesn't immediately convert it into equity. Instead, they use this "voucher" to convert it when you conduct your next official funding round in the future.
What is MFN? MFN is an acronym for "Most-Favored-Nation." In this context, it means YC's "voucher" has special privileges. When you raise your next round, for example, if you find a new investor A and agree on investment terms with them (e.g., at what valuation they will invest), then YC will automatically receive terms "as good as," or even "better than," those of your new investor A to convert this $375,000 into equity.

To give an analogy, it's like when you go shopping:

You tell the vendor (YC): "I'll pay you $375,000 now, but don't give me the goods (equity) yet. When the next person (your next investor) comes to buy, whatever discount you give them, you must give me the same or even a better discount, and then I'll use this $375,000 to claim my goods."

A key point is that YC's SAFE is "Uncapped." This means that no matter how high your company's valuation is in the next funding round, YC will convert their investment according to the terms most favorable to them. This is generally founder-friendly because it doesn't set a ceiling on your future valuation prematurely.

In Summary

So, once you are accepted into YC, the entire standard investment deal is:

You immediately receive $500,000 in cash.
In exchange, YC receives:
1. 7% definite equity in your company.
2. A "voucher" (MFN SAFE) worth $375,000, which can be converted into equity under the most favorable terms during your next funding round.

This design is quite clever. For founders, it provides a significant amount of seed funding ($500,000 is substantial for an early-stage team) all at once, addressing immediate needs. For YC, this ensures they can acquire a baseline 7% equity in all companies in a standardized way, and also "ride along" in subsequent funding rounds via the MFN SAFE, securing the best investment terms and ensuring their interest isn't overly diluted.

I hope this explanation helps you! For early-stage founders, understanding these basic terms is quite important.