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I agree with the basic principle of a liquidation preference, but his argument sounds like a bit of a strawman. If he invests 20% for $1 million - he's validat
by unexpected 16y ago
I agree with the basic principle of a liquidation preference, but his argument sounds like a bit of a strawman.
If he invests 20% for $1 million - he's validating the idea at $5 million dollars. Presumably, the investor has to due enough due diligence to say, "you know, this idea is really worth $5 million". If that's the case, if they sell for $2.5 million later on, the founders take a loss too - just because they don't have that much cash invested doesn't mean that they lost out as well.
- gyardley 16y agoIdeas aren't worth anything, and early startup valuation is just voodoo. The numbers balance the venture capitalist's need for a certain stake, the company's need for capital, and the founders' desire to avoid excessive dilution. They don't actually reflect what anyone would be willing to pay for the company at that stage.
- unexpected 16y agoIdeas are certainly worth something - they're just not worth anything unless they're actually implemented. If a VC truly believes that early startup valuation is voodoo, then he shouldn't invest. His willingness and want to invest early is shown in the amount of risk he carries, but VC's need to remember that risk carries both ways.
- davidu 16y agoIf the investor is valuing it at 5mm, so are you. You are telling the investor that the company is worth at least 5mm. If it sells for 2.5mm, you screwed up. Why should you participate in the proceeds of a sale?