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Background: I'm a seed-stage VC and was an early startup employee twice. I feel like there are some misconceptions in some of the other comments on this page.

Background: I'm a seed-stage VC and was an early startup employee twice. I feel like there are some misconceptions in some of the other comments on this page. - The expected value of stock is not zero. The median value might be zero, but certainly not the expected value. Check out this study of angel investment returns: [1]. Estimating from the chart on slide 5: 35% of investments went to $0, 17% were worth less than the last investment valuation, 33% were were 1x-5x, 7% were worth 5x-10x, 8% were worth 10x+. - The study mentioned above covers angel investments, which are generally higher variance than late stage investments. For later stage companies with real revenues, your chances of going to zero are lower, but your chances of going to 6x or 30x are also lower. - It doesn't matter if you own 0.2% while an investor owns 20%. What matters is the exit multiple. If you have $200k worth of options over 4 years, and then the company exits at 10x its current value, your options will be worth approximately $2m. It doesn't matter if $200k represents 0.2% or 20% because 10 times $200k is still $2m. - If the company does so-so and exits below its current value, there's a chance that your options will be worth less than you expected. This is because investors usually have a right to get paid off first during an exit. Let's say the company is currently worth $200m and investors put in $70m so far and own 50% of the company. If the company exits for $100m, you would think non-investors would split 50% of the $100m, but actually they only split the remainder after the $70m investment is paid off (which is 30% instead of 50%). - Don't bank on follow-on option grants in the future. You might get these, but you might not. - If you're getting options, there's a good chance you have to pay the strike price to keep the options if you leave the company. Or you have to stay at the company until it IPOs or gets acquired. As a rough guide, the main thing you need to know is the % of the company you would own and the last valuation. The expected value might be something like 2x or 3x over time, but with a huge variance. The salary + equity offer is basically a measure of how risk averse you are. Would you rather have $600k in salary over 4 years, or $450k in salary and a lottery ticket that is worth $0 50% of the time, worth $100k 25% of the time, worth $400k 15% of the time, and worth $2m 10% of the time? The latter offer has a higher expected value, but also comes with a higher chance of walking away with $450k instead of $600k. [1] - http://www.angelcapitalassociation.org/data/Documents/Resources/AngelGroupResarch/1d%20-%20Resources%20-%20Research/ACEF%20Angel%20Performance%20Project%2004.28.09.pdf http://www.angelcapitalassociation.org/data/Documents/Resour...

sawthat 11y ago
You are discounting equity, bonus and future raises at bigco that you won't get at a startup. At bigco you can get rsus that are worth $25k all of the time, and 200k some times.
- lpolovets 11y ago
  That's a good point. I agree, but IMO you can't bank on those. For example, I worked at Google for 3.5 years, got 1 small raise and 2 small refresher grants. At another startup, I never got a raise but got 1 huge refresher grant. Also, OP is talking about a late stage startup, which probably spends more like a BigCo than a seed stage startup.
geofft 11y ago
> The expected value of stock is not zero. The median value might be zero, but certainly not the expected value. Sure, but humans care more about the median value than the expected value. See also the St. Petersburg paradox. Expected value is infinite, but general consensus is that it's irrational to pay more than a couple of dollars to play the game. > It doesn't matter if you own 0.2% while an investor owns 20%. What matters is the exit multiple. If you have $200k worth of options over 4 years, and then the company exits at 10x its current value How should I judge the exit multiple? Especially for a late-stage company, isn't it generally reasonable to estimate it as 1x?
- lpolovets 11y ago
  > Sure, but humans care more about the median value than the expected value. See also the St. Petersburg paradox. Expected value is infinite, but general consensus is that it's irrational to pay more than a couple of dollars to play the game. Not sure I agree with that. Simple thought experiment: would you prefer "$100" or "51% chance at $0, 49% chance at $1000"? I strongly suspect you'd prefer the latter, even though the median for that scenario is $0. My argument isn't that every startup might be the next Uber and that as a result you should take whatever stock you can get; it's that on average, startups increase in value (otherwise both startups and venture capital would quickly die), so stock has a positive EV. Not in the "99.9% chance it's $0, .1% chance it's Uber" sense, but in the 50% chance 0, 40% chance 2x, 10% chance 10x sense (which is pretty reasonable, especially if you work for 5 or 10 startups during your career). > How should I judge the exit multiple? Especially for a late-stage company, isn't it generally reasonable to estimate it as 1x? VCs are generally looking for 3x-4x returns on average, and they'll never invest in a startup if the expected value isn't at least 3x-4x based on some estimated probability distribution. So the expected exit multiple is usually at least 3x or so. The later stage you go, the more predictable and narrow the exit distribution becomes. For example, pre-product, a VC might be investing on the 2% chance that something will go up 200x. Post-launch but pre-revenue, a VC might be looking for a 5% chance of a 60x. Series A or B, it might be more like 40% chance that the VC at least gets their money back and 30% chance they'll make 10x. Growth stage, it might be more like 60% chance the VC doesn't lose any money, 30% chance it's a 5x. In all of these cases, expected value might be 2x-4x, but variance drops off drastically as a company matures. (Seed VCs are usually aiming for more like 4x-5x for their funds, while a late stage VC is aiming for 3x, so the lower variance is compensated by lower expected returns.)

sawthat 11y ago

You are discounting equity, bonus and future raises at bigco that you won't get at a startup. At bigco you can get rsus that are worth $25k all of the time, and 200k some times.

lpolovets 11y ago
That's a good point. I agree, but IMO you can't bank on those. For example, I worked at Google for 3.5 years, got 1 small raise and 2 small refresher grants. At another startup, I never got a raise but got 1 huge refresher grant. Also, OP is talking about a late stage startup, which probably spends more like a BigCo than a seed stage startup.

geofft 11y ago

> The expected value of stock is not zero. The median value might be zero, but certainly not the expected value. Sure, but humans care more about the median value than the expected value. See also the St. Petersburg paradox. Expected value is infinite, but general consensus is that it's irrational to pay more than a couple of dollars to play the game. > It doesn't matter if you own 0.2% while an investor owns 20%. What matters is the exit multiple. If you have $200k worth of options over 4 years, and then the company exits at 10x its current value How should I judge the exit multiple? Especially for a late-stage company, isn't it generally reasonable to estimate it as 1x?

lpolovets 11y ago
> Sure, but humans care more about the median value than the expected value. See also the St. Petersburg paradox. Expected value is infinite, but general consensus is that it's irrational to pay more than a couple of dollars to play the game. Not sure I agree with that. Simple thought experiment: would you prefer "$100" or "51% chance at $0, 49% chance at $1000"? I strongly suspect you'd prefer the latter, even though the median for that scenario is $0. My argument isn't that every startup might be the next Uber and that as a result you should take whatever stock you can get; it's that on average, startups increase in value (otherwise both startups and venture capital would quickly die), so stock has a positive EV. Not in the "99.9% chance it's $0, .1% chance it's Uber" sense, but in the 50% chance 0, 40% chance 2x, 10% chance 10x sense (which is pretty reasonable, especially if you work for 5 or 10 startups during your career). > How should I judge the exit multiple? Especially for a late-stage company, isn't it generally reasonable to estimate it as 1x? VCs are generally looking for 3x-4x returns on average, and they'll never invest in a startup if the expected value isn't at least 3x-4x based on some estimated probability distribution. So the expected exit multiple is usually at least 3x or so. The later stage you go, the more predictable and narrow the exit distribution becomes. For example, pre-product, a VC might be investing on the 2% chance that something will go up 200x. Post-launch but pre-revenue, a VC might be looking for a 5% chance of a 60x. Series A or B, it might be more like 40% chance that the VC at least gets their money back and 30% chance they'll make 10x. Growth stage, it might be more like 60% chance the VC doesn't lose any money, 30% chance it's a 5x. In all of these cases, expected value might be 2x-4x, but variance drops off drastically as a company matures. (Seed VCs are usually aiming for more like 4x-5x for their funds, while a late stage VC is aiming for 3x, so the lower variance is compensated by lower expected returns.)