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Investor Herd Dynamics

paulgraham.com

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Re: Investor Herd Dynamics

#21

Post by nadam »

kken wrote: post #20
nadam wrote: post #18

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars…

>In a perfect market the company's new valuation is obviously 1.1 million dollars. Why? It is still 1 million dollars. The only difference is that the owner now owns 0.9M$ worth of company shares and 0.1M$ cash.

I thought the money goes to the company, not the original owner. I think this is what pg suggested in the article.

Re: Investor Herd Dynamics

#22

Post by fragsworth »

nadam wrote: post #21
kken wrote: post #20

Earlier quoted context omitted.

>In a perfect market the company's new valuation is obviously 1.1 million dollars. Why? It is still 1 million dollars. The only difference is that the owner now owns 0.9M$ worth of company shares and 0.1M$ cash.

I thought the money goes to the company, not the original owner. I think this is what pg suggested in the article.

If a company owns cash, and you own a percentage of that company, it is not really different from owning a percentage of that cash.

The rest of the company still has the same value, plus some (unclear) amount from having successfully raised money.

Re: Investor Herd Dynamics

#23

Post by _pius »

tkiley wrote: post #7

It seems like the earliest investor in a multi-party round invariably gets shortchanged in the literal dollar value of the deal. If committed investors raise the valuation of a startup, would it make sense for a startup to offer a slightly-sweetened valuation for the first investor to commit? I understand that no one likes to have the price raised on them later, but perhaps the underlying truth of increasing valuatio…

http://www.paulgraham.com/hiresfund.html

Re: Investor Herd Dynamics

#24

Post by sdpurtill »

nadam wrote: post #18

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars…

All your questions can be answered in the Transparent Term Sheet from Founders Fund: http://foundersfund.com/termsheet

It has a calculator that provides economic breakdowns and a supporting article defining the key terms of a term sheet.

Re: Investor Herd Dynamics

#25

Post by ganeumann »

nadam wrote: post #18

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars…

The money buys new shares in the company. Think about it in per share terms. In your example:

- Pre-money there are 1,000 shares, valued at $1,000 each

- The company sells 100 new shares for $1,000 each

- Post-money there are 1,100 shares

So after selling 100 shares, the original owner now owns 1,000/1,100 shares = 90.9%. The new valuation is 1,100 shares * $1,000/share = $1,100,000.

Re: Investor Herd Dynamics

#26

Post by nadam »

ganeumann wrote: post #25
nadam wrote: post #18

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars…

The money buys new shares in the company. Think about it in per share terms. In your example: - Pre-money there are 1,000 shares, valued at $1,000 each - The company sells 100 new shares for $1,000 each - Post-money there are 1,100 shares So after selling 100 shares, the original owner now owns 1,000/1,100 shares = 90.9%. The new valuation is 1,100 shares * $1,000/share = $1,100,000.

Now everything is clear, thanks!

Re: Investor Herd Dynamics

#27

Post by harryh »

nadam wrote: post #18

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars…

The fact that selling a portion of your ownership (so the cash goes in your pocket) is different from your company raising an investment (so the cash goes in the company's bank account) is the source of your confusion.

Re: Investor Herd Dynamics

#28

Post by pisarzp »

nadam wrote: post #18

Can someone point to a link which explains the math of startup fund raising? I was thinking about it, and what I get is a paradox: I assume the definition of raising money is that the original owner gives some percentage of the company to a new owner, and the new owner gives an amount of money to the company. Let's say the company's valuation is 1 million dollars. Let's say the owner sells 10% for 0.1 million dollars…

You confused a little bit pre-money and post-money valuation.

If company is worth 1m, and someone invests 100k, they get 0.1/(1+0.1) (current value of company + additional $100k after investment) worth of shares, what gives investor c. 9% of shares.

Founder now has 91% of shares, what still give him $1m. (91% x $1.1 = $1m)

Re: Investor Herd Dynamics

#29

Post by harryh »

anigbrowl wrote: post #19
tkiley wrote: post #7

It seems like the earliest investor in a multi-party round invariably gets shortchanged in the literal dollar value of the deal. If committed investors raise the valuation of a startup, would it make sense for a startup to offer a slightly-sweetened valuation for the first investor to commit? I understand that no one likes to have the price raised on them later, but perhaps the underlying truth of increasing valuatio…

What's lost in absolute $ terms is (IMHO) more than made up for by being known as the early bird, which status will yield other opportunities. In game theory terms being early is not optimal in a single round but close to optimal in the iterated competition that more often prevails.

But it's very rarely known who is the early bird in investment rounds.

Re: Investor Herd Dynamics

#30

Post by larrys »

dfabulich wrote: post #6

"VCs will sometimes ask which other VCs you're talking to, but you should never tell them." Why not? (Unless I missed it, the article doesn't explicitly say.)

"Why not? "

One thought that comes to mind is if you mention that you are also talking to "Sam " then "Bob" (who you are having a conversation with) can start to game Sam, or Sam can game Bob (when Bob mentions it to Sam later if they know each other).

So in terms of general business "loose lips sink ships" this is something to avoid.

So either party can play mind games with the other. And depending on the relationship of the two this could create a problem.

Other thing is that this gives the VC you are pitching a chance to drop things in your mind about the other VC that might affect your judgement. "Oh well he's a great guy but the one thing you need to consider is..."

My guess is PG might feel that the type of people in YC don't have enough experience to manage this situation properly so it's really similar to an attorney saying "don't say anything let me do the talking".

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