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The Equity Equation

paulgraham.com

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Re: The Equity Equation

#81

Post by nostrademons »

create_account wrote: post #76
nostrademons wrote: post #45

Earlier quoted context omitted.

Am trying to remember if I did that after I was rejected from SFP2005...I know that I offered them free equity in exchange for advice and the ability to come to the YC dinners, but I can't remember if I offered cash. Probably not, as I was poor at the time. My offer was ignored, BTW.

Not surprising... the benefit of getting accepted is getting face time for advice and networking with potential investors at their dinners, etc., not the funding. If they said yes to that, there'd be no need to apply, we'll all just show up at Graham's house every day.

Well, if they said yes to that, they'd have equity in a huge number of companies too. ;-)

But yeah, I can understand why they didn't go for it. It's turned out that yCombinator partner time is the scarcest resource in the Founders Programs. It makes sense to concentrate that where it's most likely to have the most effect, in the accepted founders. Which unfortunately doesn't include me.

This was for the first funding cycle though: at the time, nearly everyone harped on the money and not on the fringe benefits. Maybe Graham et al knew that partner bandwidth would be scarce, but I thought I was being clever by going for the part I really needed and offering to give up the part that didn't matter so much to me.

Re: The Equity Equation

#82

Post by cperciva »

pg wrote: post #68
cperciva wrote: post #65

Earlier quoted context omitted.

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.

Then you're still wrong. I quote from the article: "For example, suppose Y Combinator offers to fund you in return for 6% of your company. In this case, n is .06 and 1/(1 - n) is 1.064. So you should take the deal if you believe we can improve your average outcome by more than 6.4%."

If by "average outcome" you mean "expected value of the utility function", and assuming that my utility-of-money function is sqrt($), I don't need to improve my "average outcome" by more than 6.4% for the deal to be worth accepting; it's enough if I can increase my "average outcome" by 3.2%, since that's how much UTILITY giving up 6% of the MONEY costs me.

Re: The Equity Equation

#83

Post by cperciva »

create_account wrote: post #72
cperciva wrote: post #65

Earlier quoted context omitted.

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%.

Since you're good at math and know something about finance, why not just get a job at a hedge fund? You'll get rich, and you won't get heckled by a bunch of startup founders.

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.

Re: The Equity Equation

#84

Post by daniel-cussen »

dpapathanasiou wrote: post #67
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…

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?th…

The letter in the link is probably the most pathetic letter I've ever read.

Re: The Equity Equation

#85

Post by nostrademons »

daniel-cussen wrote: post #84
dpapathanasiou wrote: post #67

Earlier quoted context omitted.

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?th…

The letter in the link is probably the most pathetic letter I've ever read.

Clearly, you've never seen this letter before: http://www.snopes.com/embarrass/email/tripplehorn.asp

Re: The Equity Equation

#86

Post by garbowza »

pg wrote: post #78
pg wrote: post #69

Earlier quoted context omitted.

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.

Maybe this is not so innocent as I thought. Apparently Seth Levine is the partner of Brad Feld, the founder of Techstars: http://www.foundrygroup.com/team.php What a slimy move. It won't make any difference in the long run though.

Definitely self-serving move, and certainly won't make any difference in the end... articles like the USAToday one always need to find that contrarian view in order to seem unbiased. I'm sure Seth Levine was all to happy to provide them the material. But how would you feel if you were a Techstars startup group and you see him making comments like that - blasting the model of his partner's program!?

Re: The Equity Equation

#87

Post by eposts »

pg wrote: post #78
pg wrote: post #69

Earlier quoted context omitted.

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.

Maybe this is not so innocent as I thought. Apparently Seth Levine is the partner of Brad Feld, the founder of Techstars: http://www.foundrygroup.com/team.php What a slimy move. It won't make any difference in the long run though.

Good catch Paul! Surprise, surprise Seth Levine is a "mentor" at Techstars: http://www.techstars.org/site/page/pg5883.html

What a shame!

Re: The Equity Equation

#88

Post by euccastro »

nostrademons wrote: post #81
create_account wrote: post #76

Earlier quoted context omitted.

Not surprising... the benefit of getting accepted is getting face time for advice and networking with potential investors at their dinners, etc., not the funding. If they said yes to that, there'd be no need to apply, we'll all just show up at Graham's house every day.

Well, if they said yes to that, they'd have equity in a huge number of companies too. ;-) But yeah, I can understand why they didn't go for it. It's turned out that yCombinator partner time is the scarcest resource in the Founders Programs. It makes sense to concentrate that where it's most likely to have the most effect, in the accepted founders. Which unfortunately doesn't include me. This was for the first funding…

It's not only time but respect too. The ability of YC to connect startups with investors and acquirers depends on its ability and commitment to select only the most promising teams. Anything that may look like a deviation from that would harm the YC brand.

Waiving the cash suggests that you have your priorities right, but if YC believes in you, that money serves you both better in your pocket than in YC's, don't you think?

Re: The Equity Equation

#89

Post by euccastro »

gibsonf1 wrote: post #51
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.

It looks like a great idea - except - the sucking up of bandwidth to make the first backup. I'm definitely looking for a better remote backup service for my Architecture firm, for which I currently pay far too much, but my server unfortunately is Windows SBS 2003 - whose OS I truly dislike. I am forced to do this for compatibility with my Revit BIM software unfortunately, so I guess your product won't help me.

If that would be a problem, give that first upload for free. Or is your concern about something other than cost?

Re: The Equity Equation

#90

Post by euccastro »

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.

My first reaction was: I see this more as donationware open source. But then again, if you feel your technology would be hard to replicate, and if the cost is on the S3 ballpark, I'm in.
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