These comments are very confusing. Paul -- a simple question: doesn't the amount of capital offered/invested have a big impact on the calculation? Sure I'd give up 6% of my pre-natal company for $1 million. But would I for $1 thousand? No. Doesn't your analysis suggest that in both cases the calculation is 1/(1-n)? Yet the ability to add 6.4% value at exit given $1 million is vastly different than if given $1 thousand...
The Equity Equation
131–140 of 160 posts
Re: The Equity Equation
#132So very useful. These are issues we all have to parse through and while you note it's not a magic formula, it's certainly a good one to understand as a young entrepreneur. Thanks.
Nate Westheimer
BricaBox.com
Re: The Equity Equation
#133Sorry for my ignorance, how can one calculate his company value ?
Re: The Equity Equation
#134But it's not that simple. Startups are always measured against their competitors. So even if the 1/(1-n) shows that it is a net gain for me, it may be an overall loss if my competitors make deals that are worth significantly more for them.
Re: The Equity Equation
#135Earlier quoted context omitted.
I know something about economics, but far less about finance. :-) In any case, finance really doesn't interest me. I routinely tell Wall Street headhunters to stop bothering me because I would rather create something impressive than own something impressive. I'm not in this for the money.
Well, your demeanor is very ingrained into your personality. I doubt you can change it without a lot of effort. Even saying little things like "I routinely tell Wall Street headhunters to stop bothering me..." comes off as arrogant. Do you really not see that? Or do you just not care? Let's put it this way: How arrogant you are perceived as can be measured by how many times you say "I".
And how condescending you are perceived as can be measured by how many times you say "you"
Re: The Equity Equation
#136Earlier quoted context omitted.
I know something about economics, but far less about finance. :-) In any case, finance really doesn't interest me. I routinely tell Wall Street headhunters to stop bothering me because I would rather create something impressive than own something impressive. I'm not in this for the money.
Well, your demeanor is very ingrained into your personality. I doubt you can change it without a lot of effort. Even saying little things like "I routinely tell Wall Street headhunters to stop bothering me..." comes off as arrogant. Do you really not see that? Or do you just not care? Let's put it this way: How arrogant you are perceived as can be measured by how many times you say "I".
And how condescending you are perceived as can be measured by how many times you say "you"
Re: The Equity Equation
#137How can you determine the improved outcome? thanks!
Re: The Equity Equation
#138Great article! Very informative.. I think you just improved my prospects by 10% and that advice was free!
Re: The Equity Equation
#139Nice 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…
In this case, oversimplifying is warranted, mostly because the things glossed over are either sufficiently complicated that it's hard to make simple, or are things are already generally known. Take, for example, the 50% point. Once you hand over so much stock that the amount you and the people you implicitly trust hold dips below 51%, you've lost control. Clearly an issue outside of the 1/(1-n) equation, and yet not…
I agree that simplifying is warranted! I can't understand complex things anyway. Plus if you can't explain it, you don't understand it.. here I feel like I got some modicum
of insight.
Re: The Equity Equation
#140Sorry for my ignorance, how can one calculate his company value ?
Most of the time it is made up..
The theory is that the market will grow and/or you will exhibit exponential growth. Take for example Google which is valued by the outstanding shares value (market cap) which is driven mostly by public perception of market growth and Google's operation with respect to real and perceived growth..
So apply this to your startup.. get VCs to bid on it.. If you have revenues then you can go to a bank and see what type of credit line your business qualifies for. But since most startups don't have revenue then you really don't know.
Essentially your initial idea is worth $0... this is why angel investors are nice to have. They make the first real valuation.