Can you explain how it could be a bad deal for some - I'm struggling to understand what at all could be negative - this feels like 100% upside for the founders.
It's a bad deal if you have other willing investors. Let's say you exit YC and have a helpful angel (or many) who want to invest. Without the YC note, you may choose to let them invest $20-50k checks at a good deal, say (just example numbers) $12-15M post, before you raise a proper seed at $20M+ post. In that scenario, the YC note converts with the helpful angels.
In another scenario, let's say you get a term sheet for your seed at demo day, $3M @ $20M post from a firm that wants 15%. Then you add in another $1M from angels (5%) and the mandatory $375k from YC (1.8%) and you're at 21.8% dilution. Or you take $375k less and cut out angels you wanted on the cap table.
I've read this post probably 20 times in the last day or so (honestly) - and I'm still trying to puzzle through what the possible negative elements are.
I think the idea is that the VC is coming in at $20M valuation, but the angels are coming in at $12M valuation, and you want the angels money (for their connections/assistance) - but only want, say, $150K of their money at $12M valuation. But, if you accept their money at $12M, then you also have to accept YC @ $375K as well - which leads to greater dilution than you want.
