4 ms·

Does Price Matter?

48 points by cwan 16y ago

bretpiatt 16y ago
Summary: More great advise from Fred, you're adding somebody to your family when you take on an investor not just getting a silent pile of money. So consider what else comes along with the money and don't always just take the highest offer -- look at the value of each. The same applies for a sale transaction. Opinion: While this is somewhat self serving for him to get people thinking this way it is true. Consider this example: Investor A offers you 5M at 20M for 25% of the company but doesn't know or understand your market and investor B offers you 4M at 16M for 25% of the company but has built a successful business in your market before and can help you avoid costly mistakes. The same applies on a sale transaction. If you think the acquirer doesn't understand your business then the maximum value you'll see from that transaction is on the day of it. If you believe they understand it and it'll continue to grow you can stay on board and create much more value of which you'll be rewarded for.
- chunkbot 16y ago
  It all comes down to "smaller piece of a bigger pie". http://www.paulgraham.com/equity.html http://www.paulgraham.com/equity.html
- zaidf 16y ago
  I'm sure the opposite also holds true: just because as an investor you can squeeze a low valuation, there can be such a thing as too low. So sure you may have won the round of negotiations, but you both lose when the founders lose interest and the co tanks.
ssp 16y ago
I'm not sure I get it. From the perspective of the investors, the 300 million sale seems better. Are they not trying to maximize the return on their money?
- apu 16y ago
  The expected return is (probability of success) X (value at success). In practice, the probability is what matters far more, and so that's what you optimize for. It doesn't matter what valuations/etc. are in place if the company tanks.
  - ssp 16y ago
    But this is a company being sold. It's an exit.
    - psawaya 16y ago
      The company might be more profitable in the long run if it has better chemistry with its acquirer, even they didn't make the highest offer.
      - Dylanlacey 16y ago
        This is predicated, of course, on investors taking a long term view. I think it's been shown that we don't tend to do that.
    - reitzensteinm 16y ago
      I'm under the impression that a lot of large sales have earn out clauses and portions in escrow, and bad chemistry in the sale could cause big problems getting all that cash. That may be a factor. (I've never personally gone through an acquisition myself, on either side of the table).
    - fredwilson 16y ago
      great question go check out the comment thread on the post great discussion on that exact issue
    - aneth 16y ago
      There is also responsibility toward employees, customers, and partners, and to leave a reputation for building great companies and products. It's only a pure exit if none of those things will carry on and the investors get only cash, which would almost never happen. These other responsibilities are unfortunately not respected by many investors, which is why founders try to keep control, a la Facebook and Google.
deleted 16y ago
[deleted]

48 points by cwan 16y ago

Summary: More great advise from Fred, you're adding somebody to your family when you take on an investor not just getting a silent pile of money. So consider what else comes along with the money and don't always just take the highest offer -- look at the value of each. The same applies for a sale transaction. Opinion: While this is somewhat self serving for him to get people thinking this way it is true. Consider this example: Investor A offers you 5M at 20M for 25% of the company but doesn't know or understand your market and investor B offers you 4M at 16M for 25% of the company but has built a successful business in your market before and can help you avoid costly mistakes. The same applies on a sale transaction. If you think the acquirer doesn't understand your business then the maximum value you'll see from that transaction is on the day of it. If you believe they understand it and it'll continue to grow you can stay on board and create much more value of which you'll be rewarded for.

chunkbot 16y ago
It all comes down to "smaller piece of a bigger pie". http://www.paulgraham.com/equity.html http://www.paulgraham.com/equity.html
zaidf 16y ago
I'm sure the opposite also holds true: just because as an investor you can squeeze a low valuation, there can be such a thing as too low. So sure you may have won the round of negotiations, but you both lose when the founders lose interest and the co tanks.

ssp 16y ago

I'm not sure I get it. From the perspective of the investors, the 300 million sale seems better. Are they not trying to maximize the return on their money?

apu 16y ago
The expected return is (probability of success) X (value at success). In practice, the probability is what matters far more, and so that's what you optimize for. It doesn't matter what valuations/etc. are in place if the company tanks.
- ssp 16y ago
  But this is a company being sold. It's an exit.
  - psawaya 16y ago
    The company might be more profitable in the long run if it has better chemistry with its acquirer, even they didn't make the highest offer.
    - Dylanlacey 16y ago
      This is predicated, of course, on investors taking a long term view. I think it's been shown that we don't tend to do that.
  - reitzensteinm 16y ago
    I'm under the impression that a lot of large sales have earn out clauses and portions in escrow, and bad chemistry in the sale could cause big problems getting all that cash. That may be a factor. (I've never personally gone through an acquisition myself, on either side of the table).
  - fredwilson 16y ago
    great question go check out the comment thread on the post great discussion on that exact issue
  - aneth 16y ago
    There is also responsibility toward employees, customers, and partners, and to leave a reputation for building great companies and products. It's only a pure exit if none of those things will carry on and the investors get only cash, which would almost never happen. These other responsibilities are unfortunately not respected by many investors, which is why founders try to keep control, a la Facebook and Google.

deleted 16y ago

[deleted]