Ralph is right. You are providing a service for startups. Right now, you have a monopoly on that market, but eventually, other YCs will rise up, and you might have to lower the amount of equity you take. Competition.

I'm not even saying that YC is being unfair. I think it's a great deal. But the "IQ test" bit reminds me of something you wrote about Viaweb: "My message to potential customers was: you'd be stupid not to sell online, and if you sell online you'd be stupid to use anyone else's software. Both statements were true, but that's not the way to convince people."

If ever YC started abusing their spring chicks, the argument would deserve to be brought up, but since YC alumni seem very happy about the deal they got, it's all rather pointless.

Ah, la la.

Not if you think someone else will improve your prospects by a bigger ratio compared to the cut they're taking though.

Don't know of anyone like that, just being pedantic.

If it's the difference between attracting a top-notch cofounder and a take-what-he-can-get cofounder. PG isn't going to write your code for you.

If it goes to an angel investor with even more experience and connections than YCombinator. I'd take Ram Shriram or Peter Thiel over Paul Graham any day...not that I could get them, but apparently I can't get PG either. ;-)

If it lets you hire key early employees. For an employee, the difference between 1% and 3% of equity is huge, and you'll be able to attract much more talented people if you give them more equity. A team of 5 "A" players will likely beat a team of 2 "A" players, 3 "B" players, and YCombinator.

I agree that it's silly to turn down YC just because the money/equity ratio is fairly low. But YC's not the be-all-and-end-all of seed funding: there are other resources out there where your equity may get better returns.

With a nod to ecuzzillo - They're just crazy.

You could have just said that, you know.

Saying it's an IQ test is wrong IMHO. But it may be a good negotiating stance.