Y Combinator continued

Some readers took issue with VentureBeat’s recent assessment that Y Combinator had successfully “nailed” the start-up incubator model. There’s one particular critique we should address.

In return for its advice and money, Y Combinator does take its pound of flesh, in the form of six percent of a company’s stock, on average, which some people think is excessive. In our earlier, favorable assessment of Y Combinator, we were referring mainly to the vibrancy of the start-ups emerging from the group — a sure sign that something is right. But let’s look a bit closer at this six percent policy.

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We asked Y Combinator partner, Jessica Livingston, more about Y Combinator’s stock policy. Turns out, Y Combinator takes ordinary common stock, she told us.

That makes Y Combinator look better than some critics have made it out to be.

“I have a real problem with Y Combinator,” said Jeff Clavier of seed capital firm SofttechVC at the Web 2.0 Expo yesterday. “Y Combinator is a rip off. They give you $6k per founder for six percent of the company. I’d be happy to double that [$6k] and I’d still be getting my stock for cheaper than I usually invest.”

What Clavier failed to mention until later, when pressed by VentureBeat, is that his firm only takes preferred stock when it does its angel rounds.

VentureBeat thus believes Y Combinator’s approach offers an advantage to entrepreneurs because they’re not held hostage by the often onerous privileged rights that preferred shareholders often demand, such as minimum payouts upon acquisition or dissolution, rights to receive compensation before common, or anti-dilution rights. Common stock aligns the interests of Y Combinator with the interests of the founders and employees, who also hold common.

And while six percent is high everything equal, these companies are often very early stage companies — often little more than an idea — and so carry significant risk. They usually require more hands-on help.

(Most of the reporting for this story was done by contributing author, Mark Coker)