For the un-indoctrinated, Y Combinator is arguably the most prestigious tech incubator in the world. Their portfolio includes Airbnb, Doordash, Coinbase, Gitlab, Dropbox, Stripe, Instacart, Reddit, and many, many more.
Historically they have invested a relatively small amount in companies. The traditional YC deal is a 7% stake of the company for a $125k investment. That puts the total valuation at about $1.8m.
This isn't changing. What
is changing is the clause where you have to accept an additional $375k at an uncapped SAFE with an MFN. In normal people speak, this means YC has "Most Favored Nation" rights which means they get the same terms as the investor with
the best terms.Wait, what?
YC gets a chance to invest more money with really good terms ahead of Demo-Day (the day YC companies show off their product and raise). At a high level, this encourages companies to raise at much higher valuations. If you give an investor good terms at a low valuation, YC can piggyback off that and dilute the founders ownership position.
This most dramatically influences international startups. US-based companies have an easier time raising more $$$ at a higher valuation. International startups have less bargaining power and access to capital which means they don't have as much leverage against YC or access to alternative incubators.
YC has birthed some of the largest companies in modern times. This move positions them to have a bigger piece of the pie moving forward, and levels up competition for seed-stage investors. I'm guessing other incubators like Techstars will soon follow suit.
If you're still confused,
this Twitter thread explains it pretty well.