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The Book of Graham

leveragedsellout.com

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Re: The Book of Graham

#81

Post by Anderkent »

crntaylor wrote: post #77
nl wrote: post #65

Earlier quoted context omitted.

It's easy to pull a quote like that and make it sound like a moral failing. If you read the comment it's quite smart observation: 1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome. The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward c…

You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else? The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard

I can't see how that's a bad thing in this context. The investor is fully aware that you'll take risks with his money - he's hoping that one of these risks will pay off hugely, if not with you then with some other startup he's invested in.

Re: The Book of Graham

#82

Post by LBarret »

crntaylor wrote: post #77
nl wrote: post #65

Earlier quoted context omitted.

It's easy to pull a quote like that and make it sound like a moral failing. If you read the comment it's quite smart observation: 1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome. The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward c…

You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else? The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard

It works like this because most investors prefer winning 100x their investment 1% of the time. Business angel are a bit different but VCs really think that way.

Re: The Book of Graham

#83

Post by pron »

rdl wrote: post #36

This was surprisingly entertaining. There's some truth to it, but it essentially misses three things: 1) The intangible benefits of being at a startup (as a founder or early employee) -- working on interesting problems, with smart people, in a well funded environment. You learn things, meet people, get to use amazing tools. (Startups definitely aren't the only way to do this -- academia or, for engineering, some part…

I think you're responding to just one part of the claim, namely that a person would be better off doing something else than a startup.

The more interesting point, I think, is not the entrepreneur side of the equation, but the YC side. The author claims that YC is exploiting entrepreneurs. This claim is more interesting (in the social-studies sense) as it seeks to uncover a particular kind of exploitation that's a feature of our current age. First, it's important to point out that this question is completely orthogonal to whether the allegedly exploited person is better off or not. A capitalist could start an iPhone factory on an island full of starving people and pay each a loaf of bread a day; while the people are certainly better off, they're still being exploited.

YC specifically is most certainly not exploiting anyone, as on average it gives companies much more value than it takes. But the question remains on whether the Silicon Valley ecosystem in general is exploitative, and I think the answer to that is yes, although this kind of exploitation is rather mild – I would call it "taking advantage" more than "exploiting". I think those taking advantage are not VCs, but large tech companies. Rather than paying regular salaries to large research departments, the SV ecosystem encourages a lottery-style payoff. Lots of people work trying to invent a novel product, or find an unexplored market niche, and instead of paying them all for their efforts, there's a large prize offered to those who succeed. I think that large tech companies are taking much more value out of this arrangement than they're putting in, so there's probably some exploitation there (in fact, any lottery-style economic construct, be it based on "merit" or sheer luck, suggests some sort of exploitation taking place).

Re: The Book of Graham

#84

Post by nl »

crntaylor wrote: post #77
nl wrote: post #65

Earlier quoted context omitted.

It's easy to pull a quote like that and make it sound like a moral failing. If you read the comment it's quite smart observation: 1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome. The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward c…

You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else? The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard

I understand many on HN aren't particularly keen on getting a job with a normal wage, but saying that is a moral hazard is pretty extreme.

Re-read the comment.

An early employee is paid a salary, and they also get options. The OP's point is that receiving the salary and options means your risk profile is different.

There's no moral hazard here, unless you believe receiving a salary is a moral hazard.

Re: The Book of Graham

#85

Post by erichocean »

crntaylor wrote: post #77
nl wrote: post #65

Earlier quoted context omitted.

It's easy to pull a quote like that and make it sound like a moral failing. If you read the comment it's quite smart observation: 1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome. The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward c…

You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else? The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard

you'll certainly take more risks if you don't experience the downside

The entire reason VCs give you the money is to take more risk. That's, literally, the point.

So you do understand things correctly, yet came to the wrong conclusion that VC were somehow being wronged by this.

Re: The Book of Graham

#89

Post by aelaguiz »

sillysaurus2 wrote: post #72
aelaguiz wrote: post #70

Earlier quoted context omitted.

Yeah that doesn't matter to me. Maybe others experience wealth differently but it made substantially no difference to my day to day happiness (once the newness of the money had worn off) - but working on a project I feel strongly about makes a strong and lasting difference.

May I ask, after you were acquired, how long did you end up working for them? How did you feel about it? Was it a jarring experience trying to transition back into more of a "traditional 9-5 mindset," or were you expected to work as hard as before? I've always wondered what that type of situation is like.

Just under 2 years, it was a nightmare. I gained weight and became depressed. I left and will never sell a company like that again. If there's an earn out it'll be 1 year, otherwise I won't do it.

Re: The Book of Graham

#90

Post by rdl »

crntaylor wrote: post #77
nl wrote: post #65

Earlier quoted context omitted.

It's easy to pull a quote like that and make it sound like a moral failing. If you read the comment it's quite smart observation: 1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome. The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward c…

You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else? The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard

If you had a machine which would charge $1 for a 1% chance of winning $1000 in 1 year, you could fairly charge people somewhere between $5 and $9.50 per pull of the handle. You'd have an exceptionally long line waiting for that deal.

The whole point is rich people, investment portfolios, etc. have an entirely different risk profile than individuals. For an individual, low-probability high EV (high variance) is dangerous, which is why you buy insurance -- essentially negative EV (a 100% chance of losing either $1 or $2, but not losing your $1000).

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