Why probability of exit of series B company lower than series A? That sounds, at least, counterintuitive.
Quite possible that the really good companies don't need to raise after Series A
TLDR Stock Options
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Re: TLDR Stock Options
#52Earlier quoted context omitted.
Hi! I'm the engineer :) I used two sources of data: https://www.cbinsights.com/blog/venture-capital-funnel-2/ which was specific to tech companies and http://files.pitchbook.com/pdf/PitchBook_1H_2016_VC_Valuatio... which covered more than just tech companies. Both only consider companies backed by American VCs. Interestingly, data I found from 2010 was very different. It seems like more recently the popularity of ear…
Serious question: Would you have enough data at this point to tell me how many lottery tickets I could buy to replace the odds of winning on startup options based on option metadata (startup round, options granted, etc)? Think of it as investment diversification.
One way to look at this is with the Kelly Criterion (https://en.wikipedia.org/wiki/Kelly_criterion), which says that in order to maximize the long-term growth rate of your capital, you must maximize the geometric mean of your capital at the end of each decision point. To make this concrete, I'll take CA Powerball as an example. According to http://www.calottery.com/play/draw-games/powerball/faqs , the jackpot starts at $40 milllion, and your odds of winning are 1 in 293 million. For simplicity I will neglect the other (smaller) prizes, and the chance of splitting the jackpot with someone else, taxes, time value of money, etc.
Suppose you have $100k in the bank, and tldroptions.io says you have a 20% chance of receiving a $60 million payout. The geometric mean of your capital is then $360k: https://www.wolframalpha.com/input/?i=exp%28.2+log%5B60%2B.1...
It would take 62 million CA powerball tickets (each with different numbers, in the same drawing) to give the same result: https://www.wolframalpha.com/input/?i=exp((x%2F293000000)*+l...
Re: TLDR Stock Options
#53From a purely monetary and risk-based viewpoint, whether to join a start-up depends on how much money you already have. Suppose you regard tldroptions.io's probability distributions and outcomes as correct, and the only thing you care about is maximizing the long-term rate of goal of your capital. Then the Kelly Criterion ( https://en.wikipedia.org/wiki/Kelly_criterion , a.k.a. Fortune's Formula) says that you should…
1% equity in a series C startup sounds wildly optimistic. You would most likely not get that much equity as a senior software engineer. It's interesting that your first calculation still favours the other choice.
Yeah, I agree. No way someone in C round will get 1%.
Re: TLDR Stock Options
#54This is fantastically useful both as a side-of-the-barn estimator, and a teaching tool. Thanks! Two things a lot of startup employees are unaware of that are worth highlighting: they actually have to buy their options, which eats into returns, and that if they leave the company they have a limited window (30 days, typically) in which to do so. In would behoove them to save/plan for this fact.
And though few think of buying options as a taxable event, the bizarro world of AMT treats it that way.
Re: TLDR Stock Options
#55Yep, IMO unless you are a founder, if your company isn't one of the top companies of the decade your 4-6 years of pay-cut toil as an early employee will likely just not be worth it, at all. The expected value of working at an early startup gets overestimated, by a lot. If you're optimizing your career, either make the most you can at an established company, or start a startup. Or... work at an enlightened startup, th…
I completely disagree. It's really not hard to find a company with great product market fit, say series B, get a bunch of equity, a decent salary, and wait a couple years for your equity to be valuable. Assuming the company is successful (of course there's risk there, but by series B a lot has been mitigated), your equity will likely be quite valuable. I actually think, risk adjusted, that's the easiest way to make a bunch of money.
I joined a startup long after product market fit, it was pretty obviously going to be moderately successful, and I was employee ~100. I never worked too terribly hard, and my equity was worth about 50% of my (not too low) salary each year.
If you're not joining at or before series A, a lot of the risk has been mitigated, and there are markets opening up to sell your equity into.
Re: TLDR Stock Options
#56#savedyouaclick
Answer is $0
Re: TLDR Stock Options
#57Earlier quoted context omitted.
Hi! I'm the engineer :) I used two sources of data: https://www.cbinsights.com/blog/venture-capital-funnel-2/ which was specific to tech companies and http://files.pitchbook.com/pdf/PitchBook_1H_2016_VC_Valuatio... which covered more than just tech companies. Both only consider companies backed by American VCs. Interestingly, data I found from 2010 was very different. It seems like more recently the popularity of ear…
Serious question: Would you have enough data at this point to tell me how many lottery tickets I could buy to replace the odds of winning on startup options based on option metadata (startup round, options granted, etc)? Think of it as investment diversification.
In the worst case, an option is going to be worth 0 and in the best case it's going to be worth > 0, so the value of an option is always positive until the company actually dies.
Lottery tickets, unlike options, cost money up front. You still can't lose more than you pay, so the payoff curve is similarly non-linear, but unless you can trade options for cash options will always beat lottery tickets.
Lottery tickets are easy to diversify in that you can buy a variety of numbers. (The times when lotteries have become a net-positive buy the buyers takes advantage of this fact.) Employee startup options are more like buying one set of numbers over and over again. On the other hand, the odds of getting any payoff from options are somewhere around 15-30%, whereas the odds of getting any payoff from a California SuperLotto Plus ticket are ~4.3%. Because you can diversify ticket numbers, you could get the same odds of getting any payoff by buying 14 tickets with different Mega numbers, which would earn you $1 to the $14 you spent. If you could buy stock in many different startups, you would be called a "venture capitalist" and those folks on average do much better than people who play the lottery.
Finally, the maximum payout of a lottery ticket is capped and known ahead of time. The largest lottery win in the US was $656 million. On the other hand you don't know going into a startup what the payoff for that particular startup is going to be, and the largest exit of all time was Facebook at $104 billion. Just like with the lottery you don't know how many ways you are splitting the payoff, but unlike the lottery it's going to be based on the decisions of the board/founders, rather than random.
Basically, the lottery is a lot simpler than a startup, with few sources of actual uncertainty, and so there's no real risk involved. It is just gambling: you can do the math to figure out what edge the house has and figure out for sure that you shouldn't do it. Startup options, on the other hand, reflect actually-unknown unknowns, and so are more valuable to those who hold more-optimist-than-average beliefs about the probability of that particular startup succeeding.
Re: TLDR Stock Options
#58Why probability of exit of series B company lower than series A? That sounds, at least, counterintuitive.
[deleted]
Re: TLDR Stock Options
#59Yep, IMO unless you are a founder, if your company isn't one of the top companies of the decade your 4-6 years of pay-cut toil as an early employee will likely just not be worth it, at all. The expected value of working at an early startup gets overestimated, by a lot. If you're optimizing your career, either make the most you can at an established company, or start a startup. Or... work at an enlightened startup, th…
I completely disagree. It's really not hard to find a company with great product market fit, say series B, get a bunch of equity, a decent salary, and wait a couple years for your equity to be valuable. Assuming the company is successful (of course there's risk there, but by series B a lot has been mitigated), your equity will likely be quite valuable. I actually think, risk adjusted, that's the easiest way to make a…
> my [startup] equity was worth about 50% of my salary each year.
The equity of many AmaGooFaceSoft employees is also worth at least 50% of their yearly salary.
Re: TLDR Stock Options
#60Does this include dilution?
Yep! That's part of what changes with the round: we assume a relatively-average dilution of 35% per round.