The Equity Equation • Hacker News Board

Re: The Equity Equation

#11

Post by ivankirigin » Wed, Jul 18, 2007, 7:22 PM UTC

cperciva wrote: post #5

Nice article, but drastically oversimplified. Paul ignores two critical issues: Risk, and non-linear utility-of-money functions. These two factors become critical when there is a tradeoff between probability of success and the payoff of success. Suppose, as a simple example, that I have a startup which I think has a 50% chance of succeeding and being sold for $1M, and a 50% chance of failing and being worthless. Now…

"I really don't want to spend years of my life on something which has a 90% chance of being worthless."

How does that mesh with the fact that a failed startup is probably worthless (in the literal sense that you can't make money from it), and most startups probably have >90% failure rate?

I know there is a learning experience in startups and that working hard on something fun is valuable, so worthless is really just talking about immediate money here.

Re: The Equity Equation

#12

Post by ivankirigin » Wed, Jul 18, 2007, 7:25 PM UTC

nostrademons wrote: post #10

ivankirigin wrote: post #7

Even in a simple model, time should be incorporated, right? The total cost for the life of the company of an employee is included, assuming a particular growth rate. What about for investment? "the total cost of this round of funding" doesn't make sense so much. And surely the rate of increased value of your company matters. Also, it seems, like you note in the end, that there is still a gut feeling, and here it is s…

"how much is your company worth if you are making $X yearly and growing at a rate of Y%" In finance, the standard answer is "the net present value of all future cash flows". Basically, all cash that the company throws off beyond expenses technically belongs to the owners. However, owners could've parked their money in T-bills instead of investing it, and they'd receive interest for it. So you discount these future ca…

Thanks!

Then my earlier points are even more important. How much will your company be worth? How much _more_ is it worth after taking more funding? Who knows? All hard questions.

Re: The Equity Equation

#13

Post by cperciva » Wed, Jul 18, 2007, 7:37 PM UTC

ivankirigin wrote: post #11

cperciva wrote: post #5

Nice article, but drastically oversimplified. Paul ignores two critical issues: Risk, and non-linear utility-of-money functions. These two factors become critical when there is a tradeoff between probability of success and the payoff of success. Suppose, as a simple example, that I have a startup which I think has a 50% chance of succeeding and being sold for $1M, and a 50% chance of failing and being worthless. Now…

"I really don't want to spend years of my life on something which has a 90% chance of being worthless." How does that mesh with the fact that a failed startup is probably worthless (in the literal sense that you can't make money from it), and most startups probably have >90% failure rate? I know there is a learning experience in startups and that working hard on something fun is valuable, so worthless is really just…

I don't think my probability of failure is 90%. :-)

This isn't as naive as it sounds: If you take VC with standard liquidation preference terms, the company needs to do really well before you get anything back -- so the amount of money you need to avoid "failing" is dramatically increased.

In my case, since I don't intend to take any VC, there's a wide range between "failure" (making less money than I would have earned risk-free by working at the university for the same duration) and "success" (making enough money that I never need to work again).

Also, on a more self-serving note: I'm a heck of a lot more competent than 90% of startup founders. Or even 90% of YC-funded-startup founders for that matter -- and YC-funded startups have distinctly less than a 90% failure rate.

Re: The Equity Equation

#14

Post by ivankirigin » Wed, Jul 18, 2007, 8:00 PM UTC

cperciva wrote: post #13

ivankirigin wrote: post #11

Earlier quoted context omitted.

"I really don't want to spend years of my life on something which has a 90% chance of being worthless." How does that mesh with the fact that a failed startup is probably worthless (in the literal sense that you can't make money from it), and most startups probably have >90% failure rate? I know there is a learning experience in startups and that working hard on something fun is valuable, so worthless is really just…

I don't think my probability of failure is 90%. :-) This isn't as naive as it sounds: If you take VC with standard liquidation preference terms, the company needs to do really well before you get anything back -- so the amount of money you need to avoid "failing" is dramatically increased. In my case, since I don't intend to take any VC, there's a wide range between "failure" (making less money than I would have earn…

"Or even 90% of YC-funded-startup founders for that matter"

Not to deny this, as I don't know anything about you, but... that is a very bold statement.

Re: The Equity Equation

#15

Post by adamdoupe » Wed, Jul 18, 2007, 8:06 PM UTC

dawie wrote: post #6

Paul, I really liked your article and I have always wondered about working out these financial details. Its cool how you did it for employees. I liked the fact that you kept it simple.

The famous KISS principle. In case you don't know: Keep It Simple, Stupid

Re: The Equity Equation

#16

Post by togilvie » Wed, Jul 18, 2007, 8:14 PM UTC

This is a nice analysis and good thinking, though it's worth noting that liquidation preference makes the VC equation less favorable. I'm not sure how Y Combinator works, but preference plays a shockingly large role when you run these types of calculations against your hypothetical VC deal.

Re: The Equity Equation

#17

Post by cperciva » Wed, Jul 18, 2007, 8:17 PM UTC

ivankirigin wrote: post #14

cperciva wrote: post #13

Earlier quoted context omitted.

I don't think my probability of failure is 90%. :-) This isn't as naive as it sounds: If you take VC with standard liquidation preference terms, the company needs to do really well before you get anything back -- so the amount of money you need to avoid "failing" is dramatically increased. In my case, since I don't intend to take any VC, there's a wide range between "failure" (making less money than I would have earn…

"Or even 90% of YC-funded-startup founders for that matter" Not to deny this, as I don't know anything about you, but... that is a very bold statement.

Of course it's a bold statement. But if I wasn't bold, I wouldn't have started university at age 13, set three world records for calculating pi (a stunt, I admit), ranked in the top six mathematics undergraduates in North America, received a $100k+ scholarship to Oxford University (not the Rhodes, unfortunately -- their mistake), received a doctorate in computer science from said university, and become the security officer for the FreeBSD operating system.

Re: The Equity Equation

#18

Post by abstractbill » Wed, Jul 18, 2007, 8:45 PM UTC

johnrob wrote: post #8

A smart company would give 6% equity to YC just for the advice and publicity. The cash is the least valuable part of the equation. 5k per person can be saved up in a number of months, even for relatively low salaries if you are stingy.

I'd honestly be surprised at this point if nobody has offered to pay YC to take equity in a startup.

Re: The Equity Equation

#19

Post by sanj » Wed, Jul 18, 2007, 8:49 PM UTC

cperciva wrote: post #17

ivankirigin wrote: post #14

Earlier quoted context omitted.

"Or even 90% of YC-funded-startup founders for that matter" Not to deny this, as I don't know anything about you, but... that is a very bold statement.

Of course it's a bold statement. But if I wasn't bold, I wouldn't have started university at age 13, set three world records for calculating pi (a stunt, I admit), ranked in the top six mathematics undergraduates in North America, received a $100k+ scholarship to Oxford University (not the Rhodes, unfortunately -- their mistake), received a doctorate in computer science from said university, and become the security o…

Did you win the Putnam?

If not, please don't be "bolder" than this guy: http://en.wikipedia.org/wiki/Ravi_Vakil

Re: The Equity Equation

#20

Post by sanj » Wed, Jul 18, 2007, 8:51 PM UTC

It's not an equation, but for employee options my gut has always been that you get options as a function of how much your improve the odds of the company's ultimate success.

Founders get a lot because they take it from zero to something.

Senior folks get a lot because the influence it significantly.

Early grants > Later grants because the ability to change the trajectory is typically smaller.