Maybe I'm reading something wrong here, but I think this actually substantially complicates the YC decision calculus. YC today is an overwhelmingly good proposition and so I do think they can add this without turning any off, but this does make further rounds either slightly harder or more expensive.
If a VC wants to own 20% at the end of an A, or 10% after a B, having YC in there with rights to buy back up to their 7% can add real dilution you wouldn't have otherwise wanted or needed to incur. As someone who did a party round seed and had a crowded A, it really does add up; though, it's for sure a first world problem and won't kill you, whereas YC for many companies is when they get serious.
YC is so valuable that this won't turn anyone off at the traditional YC early stage, but I wonder how this will affect things for the "late-early" companies they've been taking more of in the last few batches.
I tend to be optimistic about things YC does until proven otherwise, they've earned that. Having pro rata rights is a reasonable way for YC to deploy a lot more capital in a signaling-neutral way, with some inherent bias towards companies that are doing better.
You are right that it does substantially change things for ownership conscientious investors.
There are myriad other issues as well, perhaps the two most interesting are:
1. When I went through YC, it was emphasized that YC had the same equity situation as founders. That's certainly not the case now.
2. Pro rata is often an actively managed situation, I'm curious how YC will handle situations where founders/future investors seek to retroactively adjust pro rata
The numbers are pretty small. Pro rata doesn't apply to employee option pool dilution, so it's really probably only 5% of a round. If a VC says they will do an investment if they can own 20% but not 19% of a company, I believe they are lying.
Sam is right.... VCs put a line in the sand and everyone gets into a tizzy. Then you say to them "listen, I gave prorata to my early supporters and I intend to keep my word and reward them for their support."
The VC then has respect for the founder and say "OK, let's do it."
If they don't respect the prorata of the existing investors you need to ask yourself if this is the right VC to have as a partner. If they are so encouraging of you to screw your existing partners, how do you think they will treat you in a down market?
I don't know how much this really affects dilution. Without YC doing this, your shares would represent 80% of their previous value (X + .2 Z = Z). If YC adds so it maintains 7%, you would have 78%(X + .2 Z + (.07 Z - 0.07 X) = Z, .93 X = .73 Z)
So if you have 30% right now, you would have either 24% without YC taking part or 23.4% if they do.
If a VC is in a position to dictate the deal structure, then all the old terms are subject to renegotiation, anyway. Founders whose best option is to raise money with accept-a-bad-cap-table-or-go-under terms probably aren't going to be hosed because of YC blind exercising their option.
I may not be fully understanding the situation, but it seems to me that the only time YC exercising their option would create a lot of friction is when the round leader has a problem with YC's participation. While not a red flag, that would certainly be the subject of an important conversation.
In the end, raising money is a founders' bet that the funders are trustworthy.
You could always choose to ask for less money. Some VCs might turn you down if you say "actually, we don't need that much, thanks", but it seems unlikely that all will.
If a VC wants to own 20% at the end of an A, or 10% after a B, having YC in there with rights to buy back up to their 7% can add real dilution you wouldn't have otherwise wanted or needed to incur. As someone who did a party round seed and had a crowded A, it really does add up; though, it's for sure a first world problem and won't kill you, whereas YC for many companies is when they get serious.
YC is so valuable that this won't turn anyone off at the traditional YC early stage, but I wonder how this will affect things for the "late-early" companies they've been taking more of in the last few batches.