The Valuation Boost Needed to Justify YC • Hacker News Board

Re: The Valuation Boost Needed to Justify YC

#11

Post by jacquesm » Wed, Apr 22, 2015, 8:52 PM UTC

beambot wrote: post #7

jacquesm wrote: post #6

Earlier quoted context omitted.

At some point the nasty matter of 'control' will rear its head and you might regret selling any shares early on. Some shares may turn out to be much more valuable than you ever thought they would be.

Control is a separate concern that could (indeed) play into how you "justify YC". I'm just saying: If you use "dollar-value of equity" as the metric to justify YC, OP's calculations are wrong. If you use "percent ownership", then it's fine.

What I'm getting at, in case it isn't clear that in the end those few shares that you sold cheap can come back to haunt you in later years. So dilute if you have to or want to but be very careful about the terms.

Re: The Valuation Boost Needed to Justify YC

#12

Post by brudgers » Wed, Apr 22, 2015, 9:03 PM UTC

jacquesm wrote: post #6

beambot wrote: post #5

In the company A&B example, you're calculating the post-money valuation required to maintain your equity as a percent... but not in terms of the equity's value . The founders' 87.51% is vastly more valuable for Company B (85.7% of $11.7M = $10M) compared to Company A (85.7% of $6M = $5.1M). If you're concerned with value , then the % you own is not the only key factor. I.e. 10% of a $1B company is more valuable than…

At some point the nasty matter of 'control' will rear its head and you might regret selling any shares early on. Some shares may turn out to be much more valuable than you ever thought they would be.

My hunch is that there are worse initial 7% equity holders than YC should control become an issue down the road...which is to say I haven't read about YC screwing people over control, not that founders have nit perceived such actions.

Re: The Valuation Boost Needed to Justify YC

#13

Post by [deleted] » Wed, Apr 22, 2015, 9:03 PM UTC

ivankirigin wrote: post #10

staunch wrote: post #9

Few startups choose between $1M and getting into YC, so how does this make sense? It seems like a better comparison would be raising $120k from an individual angel investor.

This post is for people that have the choice that are trying to decide whether to do it. I think they should, but I often see people getting the math wrong. Especially because YC is getting so good that companies that have a choice of raising a seed and doing YC are getting in. They delay the seed till demo day. YesGraph raised a $1M seed right before YC, so I have personal experience here.

[deleted]

Re: The Valuation Boost Needed to Justify YC

#14

Post by jacquesm » Wed, Apr 22, 2015, 9:35 PM UTC

brudgers wrote: post #12

jacquesm wrote: post #6

Earlier quoted context omitted.

At some point the nasty matter of 'control' will rear its head and you might regret selling any shares early on. Some shares may turn out to be much more valuable than you ever thought they would be.

My hunch is that there are worse initial 7% equity holders than YC should control become an issue down the road...which is to say I haven't read about YC screwing people over control, not that founders have nit perceived such actions.

Absolutely but the next round or the one after that might push you over the 50 border and it need not be YC that does the screwing, that could easily be a later investor.

Re: The Valuation Boost Needed to Justify YC

#15

Post by staunch » Wed, Apr 22, 2015, 9:45 PM UTC

jacquesm wrote: post #14

brudgers wrote: post #12

Earlier quoted context omitted.

My hunch is that there are worse initial 7% equity holders than YC should control become an issue down the road...which is to say I haven't read about YC screwing people over control, not that founders have nit perceived such actions.

Absolutely but the next round or the one after that might push you over the 50 border and it need not be YC that does the screwing, that could easily be a later investor.

At successful startups, the board controls the company and the founders control the board. Equity mostly a separate issue.

Re: The Valuation Boost Needed to Justify YC

#16

Post by brudgers » Wed, Apr 22, 2015, 10:15 PM UTC

jacquesm wrote: post #14

brudgers wrote: post #12

Earlier quoted context omitted.

My hunch is that there are worse initial 7% equity holders than YC should control become an issue down the road...which is to say I haven't read about YC screwing people over control, not that founders have nit perceived such actions.

Absolutely but the next round or the one after that might push you over the 50 border and it need not be YC that does the screwing, that could easily be a later investor.

Of course. I guess there might be soft advantages from YC's participation that reduce the probability of getting into a bad situation, e.g. access to investors less likely to throw founders overboard and a network which may make questionable investor behavior higher profile.

Re: The Valuation Boost Needed to Justify YC

#17

Post by jacquesm » Wed, Apr 22, 2015, 10:17 PM UTC

brudgers wrote: post #16

jacquesm wrote: post #14

Earlier quoted context omitted.

Absolutely but the next round or the one after that might push you over the 50 border and it need not be YC that does the screwing, that could easily be a later investor.

Of course. I guess there might be soft advantages from YC's participation that reduce the probability of getting into a bad situation, e.g. access to investors less likely to throw founders overboard and a network which may make questionable investor behavior higher profile.

That is probably a really nice side effect, something akin to a vaccination. Excellent observation.

Re: The Valuation Boost Needed to Justify YC

#18

Post by neurotech1 » Wed, Apr 22, 2015, 10:54 PM UTC

jacquesm wrote: post #14

brudgers wrote: post #12

Earlier quoted context omitted.

My hunch is that there are worse initial 7% equity holders than YC should control become an issue down the road...which is to say I haven't read about YC screwing people over control, not that founders have nit perceived such actions.

Absolutely but the next round or the one after that might push you over the 50 border and it need not be YC that does the screwing, that could easily be a later investor.

Investors would think twice about "screwing" a YC backed company. PG has clearly stated that they would blacklist VCs for various not-so-ethical practices.

Re: The Valuation Boost Needed to Justify YC

#19

Post by paulsutter » Wed, Apr 22, 2015, 11:15 PM UTC

jacquesm wrote: post #6

beambot wrote: post #5

In the company A&B example, you're calculating the post-money valuation required to maintain your equity as a percent... but not in terms of the equity's value . The founders' 87.51% is vastly more valuable for Company B (85.7% of $11.7M = $10M) compared to Company A (85.7% of $6M = $5.1M). If you're concerned with value , then the % you own is not the only key factor. I.e. 10% of a $1B company is more valuable than…

At some point the nasty matter of 'control' will rear its head and you might regret selling any shares early on. Some shares may turn out to be much more valuable than you ever thought they would be.

Actually, money losing companies are controlled by their investors, and companies that make money are controlled by management.

This is a pragmatic truth that stems from board dynamics, personal risk tradeoffs for investors, etc. Most of the fears around ownership percentage, board seats, etc, are misplaced.

Re: The Valuation Boost Needed to Justify YC

#20

Post by phantom_oracle » Thu, Apr 23, 2015, 12:37 AM UTC

Your valuation fails the simplest fundamental, which is the share % of what the VC will get after the seed round.

In VC logic, they will be getting around 14,3% for the same amount of money than they would get by giving the same 1 million for almost half the value.

In multiple dilutions at inflated figures and the "A" round where the lead VC grabs 30% (no matter how much money they give), the seed guy stands to be the biggest loser.

From the perspective of a self-serving VC, he/she stands a greater chance of vetting a company at 14,3%, giving him the opportunity to maximize return down the line, as the dilutions will not shrink by almost half (as would under your logic through YC).

However, if that VC believes in vetting a "YC-company" over his/her own ability to pick a winner, then that VC should probably not be in the startup-investing market in the first place.