Counterfactual Theory of Value

The founders can only retain as much equity as the marketplace allows. Each side has a threshold to do a business transaction.

>Why dont seed fund demand 16% instead of 8%? Why doesn't the 6th employee demand 5% instead of 3%?

The parties can demand any percentage they want but the ultimate resolution is will the other side agree to it? In other words, the question is, "Why do angels _agree_ to 8% instead of 16%"? Because an offer requiring 16% would be rejected by the founder and lose to other angels only requesting 8%.

E.g., back in 1999 during the dot-com craze, VC Sequoia Capital offered MP3.com (founder Michael Robertson) $10 million for 45% of the company. He said no deal. They later negotiated it down to 20% ... which is in the more reasonable ~15% to ~20% range of other VC deals.

Lesson: Demanding a high 45% so that the founder only retains 55% instead of 80% doesn't automatically mean the founder will say "yes" to the reduced equity. People can still voluntarily choose not to do business with you at all. All "demands" are competing in the marketplace. Can an employee demand a higher 10% equity? Sure. Whether the founders _agree_ to it depends on the marketplace and the employee's particular leverage (e.g. a very rare skill).

You should have other problems with it. Value that would be lost in the absence of a thing is unrelated to the value gained by its presence, because you have more choices than "pay for the thing" or "do without".

The theory of value espoused in this post would tell you that you should pay more for the oxygen you consume than you do for your computer.

(There is some self-contradiction in the post - it defines counterfactual value thus:

> what if pay is determined by asking: “How much would this company be worth without this individual?”

But then it provides an example of something very different:

> Baseball managers use the Counterfactual Theory of Value all the time, using a statistic called “Wins Above Replacement.” It predicts how many more wins a player gives their team, compared to whoever would replace them.)

In the sports roster case, a soccer/baseball team would be in trouble if they lost one of their average-talent players if they didn't have anyone on the pitch but there might be a plentiful supply of low-cost players willing to work for a similar amount.

This means that the counterfactual of 'lose average player and replace with noone' suggests that the player has a very high counterfactual theory of value, but 'lose average player and replace with similar average player' suggests that the counterfactual value is not high.

There might be a star player such that they are not replacable by anyone, or by anyone also able to demand a high salary from an alternative team, and they would have a very high value according to both counterfactuals.

It seems to me that many sports teams operate with the 'similar average player' counterfactual.

I think you could draw analogies to businesses and employee pay.