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The Equity Equation

paulgraham.com

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Re: The Equity Equation

#61

Post by uuilly »

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…

Test Pilots are bold by definition. Entrepreneurs are not necessarily bold. People tell me all the time how "brave" and "bold" I am for starting a startup and it's complete BS. The only think we're risking is some money, reputation and ego. All of which grow back in time. If we were doused with gas, lit on fire and smashed with ewok log traps if our startups failed then we would be bold. As it is we're just different.

Re: The Equity Equation

#62

Post by Tichy »

palish wrote: post #48
nostrademons wrote: post #42

Earlier quoted context omitted.

I get a whole lot of that (even from my family: my sister told me "So, mom and I were talking in the car, and it's great that you're doing this startup, but honestly I don't think you'll succeed.") When I gave notice today, I had to listen to my boss go on about how I was too young to start a startup (I'm 26), how he spent about 15 years after getting his Ph.D learning about business and working in the industry, how…

Good god, the amount of useful and practical advice in this comment is astounding. I hope you get 20 karma points. If you follow that advice you're 90% to success, because it says a lot about your personality. No wonder YC wants people to participate in YC News.. If I had any money I'd invest it in you.

I was going to vote him up, but then his post has exactly 20 points at the moment, so I guess I'll leave it at that ;-)

Re: The Equity Equation

#63

Post by waleedka »

cperciva wrote: post #29
menloparkbum wrote: post #24

Earlier quoted context omitted.

Well, I hope your startup idea isn't this: http://www.daemonology.net/blog/2006-09-13-encrypted-backup.... This post also shows a phenomenal misunderstanding of what it takes to create a successful software startup: http://www.daemonology.net/blog/2007-06-21-think-before-codi...

That is my startup idea. I don't want to take this thread even more off-topic (if that's even possible), but please feel free to contact me at the address in that first post to explain why you think it is a bad idea.

I think it's a good idea, but already done, though. I use Carbonite to keep an online remote backup of my hard drive. They charge a fixed rate regardless of the capacity of the drive. Of course there is always space for competition, so if you think you can improve on their offering, then go for it.

Re: The Equity Equation

#65

Post by cperciva »

pg wrote: post #54
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…

Actually not. That's why I was careful to speak of the effect of trading equity on the "average outcome" rather than e.g. "average valuation at liquidity." What I'm literally saying is, does the trade improve your odds of getting what you want? That subsumes both your risk aversion and your utility function for money.

Your math is still wrong, because of the non-linear utility of money. If I give up 6% of my company, it costs me 6% of any MONEY I might end up getting, but it doesn't cost me 6% of the UTILITY. If I have a utility-of-money function of sqrt($), you don't have to increase my chance of success by 6.4%; it's enough if you increase my chance of success by 3.2%.

Re: The Equity Equation

#66

Post by cperciva »

waleedka wrote: post #63
cperciva wrote: post #29

Earlier quoted context omitted.

That is my startup idea. I don't want to take this thread even more off-topic (if that's even possible), but please feel free to contact me at the address in that first post to explain why you think it is a bad idea.

I think it's a good idea, but already done, though. I use Carbonite to keep an online remote backup of my hard drive. They charge a fixed rate regardless of the capacity of the drive. Of course there is always space for competition, so if you think you can improve on their offering, then go for it.

If you use Carbonite, you're considerably braver than I am. Carbonite has no effective technological security, so you'd better hope that nobody breaks into their offices, none of their employees "go bad", and they're never confronted by a subpoena or have the PATRIOT act invoked against them; and they only keep the latest version of any file, so if you ever accidentally mangle a file you'd better hope that you can retrieve the unmangled version before Carbonite backs up the mangled version and throws away the older copy.

Re: The Equity Equation

#67

Post by dpapathanasiou »

nostrademons wrote: post #42
cperciva wrote: post #30

Earlier quoted context omitted.

Again you're right, and I'm sorry about the attitude. Over the past year I've started to get rather defensive when people have suggested that I'm wasting my time on this project...

I get a whole lot of that (even from my family: my sister told me "So, mom and I were talking in the car, and it's great that you're doing this startup, but honestly I don't think you'll succeed.") When I gave notice today, I had to listen to my boss go on about how I was too young to start a startup (I'm 26), how he spent about 15 years after getting his Ph.D learning about business and working in the industry, how…

But if you stoop to their level and say "Oh, look how smart I am, of course I'm going to succeed," you're just engaging in self-justification yourself. And that's a dangerous mental attitude to get into

Very well said.

Remember, whatever disappointments you have, don't come off sounding like this guy (someone who did well in school, but couldn't get hired at the firm he wanted): http://www.autoadmit.com/thread.php?thread_id=445136&mc=...

Re: The Equity Equation

#68

Post by pg »

cperciva wrote: post #65
pg wrote: post #54

Earlier quoted context omitted.

Actually not. That's why I was careful to speak of the effect of trading equity on the "average outcome" rather than e.g. "average valuation at liquidity." What I'm literally saying is, does the trade improve your odds of getting what you want? That subsumes both your risk aversion and your utility function for money.

Your math is still wrong, because of the non-linear utility of money. If I give up 6% of my company, it costs me 6% of any MONEY I might end up getting, but it doesn't cost me 6% of the UTILITY. If I have a utility-of-money function of sqrt($), you don't have to increase my chance of success by 6.4%; it's enough if you increase my chance of success by 3.2%.

"Outcome" means the output of the utility function, not the input.

Re: The Equity Equation

#69

Post by pg »

ordersup wrote: post #60
pg wrote: post #3

Earlier quoted context omitted.

No, I'd been working on it for a while. I'd been thinking of taking that footnote out, since it seemed like everyone now finally understood us. But when I saw that old dumb argument again in the USA Today article, I decided to leave it in.

I can't help but laugh at the audacity of another tech-related investment firm commenting like that. He is trying to persuade people that YC is just writing cheques.

I'm never sure whether such people are clueless or deliberately misleading. I'm inclined to give most the benefit of the doubt and say clueless. When you change the model for something, it takes people a long time to get what you're doing. I remember from web-based software.

Re: The Equity Equation

#70

Post by pg »

Anonymous314 wrote: post #58

The article ignores how market prices work - the formula presented lets you know the maximum equity you can give up and still get a positive return by doing so, but incorrectly explains why VCs accept much less - the minimum equity a VC can accept and still expect a positive return on their investment can be far lower than the maximum the startup can afford to give profitably. The VCs are subject to competition with…

Why can VCs afford to give up stock and founders not? Are you talking about liquidation preferences?

Startups are just as subject to competition. There's a profit margin on taking investment just as there is on hiring someone, and it expands and contracts depending on how hot the startups is.

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