4 ms·

[edit, naturalauction made a good point] A better way to do this, although obviously impossible to do really rigorously, is to estimate expected value of the eq

by ska 5y ago

[edit, naturalauction made a good point] A better way to do this, although obviously impossible to do really rigorously, is to estimate expected value of the equity. Note that EV will not be zero even if lots of possible paths lead to equity = 0. Compare this and the rest of your comp to other opportunities you have, and factor in how miserable it would make you if it fails (you aren't a rational actor).

H8crilA 5y ago
There's also the (sometimes) predatory capital structure. And please understand the capital structure - that not all "shares" are made equal. Also Even if the "expected value" is high, how would you feel after spending years on what turns out to be a pretty low salary with no extra equity value, which is a very high probability event? Up to everyone to answer. Those two are why I'm pricing such things at $0, unless there's a liquid market, simple capital structure and ordinary 10-Ks in EDGAR.
- ska 5y ago
  > There's also the (sometimes) predatory capital structure. Whatever you call this sort of thing (predatory or otherwise), obviously it goes into your EV estimate/swag. FWIW my answer to this stuff is never take a salary so low you would be unhappy if it tanks, which isn't the same thing as valuing equity at zero.
  - H8crilA 5y ago
    Ok but my point is: Understand that the "shares" that you get may end up being worth exactly $0, while the "shares" of the venture capital investor may end up being worth substantially > $0, because they sometimes are different things. Just saying "oh yeah factor that in" doesn't help anyone who may not even know there could be a whole different class of "shares", as well as other corporate liabilities. Relevant XKCD: https://xkcd.com/793/ https://xkcd.com/793/
    - ska 5y ago
      > Just saying "oh yeah factor that in" doesn't help anyone who may not even know there could be a whole different class of "shares", as well as other corporate liabilities. By all means educate yourself, but this information has been out there for decades at this point. I'm in no way advocating you saying "Oh, they gave me 1% on day 1, that means I'll get 5mm on a 500mm exit". You need to think about impacts of dilution and preference at minimum, but there's data on this. And note I never claimed it would be accurate, the error bars are huge. But it's obviously more accurate than just setting it equal to zero. Which people really don't do, by observed preference. Since we are in the weeds now, my actual advice on seed or earlier equity is mostly judge it as a measure of commitment and interest.
      - H8crilA 5y ago
        Of course it has. The capital markets have not changed much since the 1600s Amsterdam. And yet it's very easy to find older engineers on HN that have some horror option exercise tax stories from the dotcom era. Heck, the same happened with trading Bitcoin at the 2017 top to a lot of people. And I'm sure there's going to be a lot more. And at the moment the very top comment in this thread is about someone who got $100k, same as everyone, except the founders who somehow got out with 8 figures. My point is to realize you're actually significantly disadvantaged. But i guess the youth has to do all the same mistakes over and over again, that's how the system goes forward. I should be cheering from the sidelines like most people do, it seems more fun :)
        ska 5y ago
        > My point is to realize you're actually significantly disadvantaged. That's true, but it shouldn't lead to valuing equity at $0. Before worrying about the impact of cap table structure you should also understand how and when they get that way - it really shouldn't be at the beginning (and if they won't show you some details then, walk away).
        deleted 5y ago
        [deleted]
naturalauction 5y ago
I'm not sure that is the "right" way (if there is a "right" way), because ideally you would find the expected utility of that equity. What I mean is that a scenario with a 100% chance of making $10 million and a scenario with a 10% chance of making $100 million and a 90% chance of making $0 hace the same expected value. However, many people will be happy to retire on $10 million or $100 million - so a 10% chance of retiring is a much worse option than a 100% chance of retiring even though they have the same expected value (the guaranteed money has a much higher expected utility).
- ska 5y ago
  Sure, but that's why I said compare to other opportunities and repeat. But you are right, I should have said "a better way". EV works ok at the beginning to sanity check, because you have very little info, and honestly unlikey enough to do a utility comparison on two similar offers. EU is really hard to even estimate here. If you truly value equity at $0, why accept it at all? Fwiw I've seen this experiment done with founding engineers, offer a sliding scale of salary and equity, in bounded ranges. 100% of people in that case (small sample) took some equity in exchange for a bit lower salary. Obviously they didn't actually value it at $0.
- vl 5y ago
  EV is a good first step because it’s way easier to calculate than EU. Look at similar companies, do the math, compare to corporate EV and boom - 95% of startup offers are really uncompetitive. Reliable EU calculations are mostly possible for pre-IPO companies, and even then…

by ska 5y ago

H8crilA 5y ago

There's also the (sometimes) predatory capital structure. And please understand the capital structure - that not all "shares" are made equal. Also Even if the "expected value" is high, how would you feel after spending years on what turns out to be a pretty low salary with no extra equity value, which is a very high probability event? Up to everyone to answer. Those two are why I'm pricing such things at $0, unless there's a liquid market, simple capital structure and ordinary 10-Ks in EDGAR.

ska 5y ago
> There's also the (sometimes) predatory capital structure. Whatever you call this sort of thing (predatory or otherwise), obviously it goes into your EV estimate/swag. FWIW my answer to this stuff is never take a salary so low you would be unhappy if it tanks, which isn't the same thing as valuing equity at zero.
- H8crilA 5y ago
  Ok but my point is: Understand that the "shares" that you get may end up being worth exactly $0, while the "shares" of the venture capital investor may end up being worth substantially > $0, because they sometimes are different things. Just saying "oh yeah factor that in" doesn't help anyone who may not even know there could be a whole different class of "shares", as well as other corporate liabilities. Relevant XKCD: https://xkcd.com/793/ https://xkcd.com/793/
  - ska 5y ago
    > Just saying "oh yeah factor that in" doesn't help anyone who may not even know there could be a whole different class of "shares", as well as other corporate liabilities. By all means educate yourself, but this information has been out there for decades at this point. I'm in no way advocating you saying "Oh, they gave me 1% on day 1, that means I'll get 5mm on a 500mm exit". You need to think about impacts of dilution and preference at minimum, but there's data on this. And note I never claimed it would be accurate, the error bars are huge. But it's obviously more accurate than just setting it equal to zero. Which people really don't do, by observed preference. Since we are in the weeds now, my actual advice on seed or earlier equity is mostly judge it as a measure of commitment and interest.
    - H8crilA 5y ago
      Of course it has. The capital markets have not changed much since the 1600s Amsterdam. And yet it's very easy to find older engineers on HN that have some horror option exercise tax stories from the dotcom era. Heck, the same happened with trading Bitcoin at the 2017 top to a lot of people. And I'm sure there's going to be a lot more. And at the moment the very top comment in this thread is about someone who got $100k, same as everyone, except the founders who somehow got out with 8 figures. My point is to realize you're actually significantly disadvantaged. But i guess the youth has to do all the same mistakes over and over again, that's how the system goes forward. I should be cheering from the sidelines like most people do, it seems more fun :)
      - ska 5y ago
        > My point is to realize you're actually significantly disadvantaged. That's true, but it shouldn't lead to valuing equity at $0. Before worrying about the impact of cap table structure you should also understand how and when they get that way - it really shouldn't be at the beginning (and if they won't show you some details then, walk away).
        deleted 5y ago
        [deleted]

naturalauction 5y ago

I'm not sure that is the "right" way (if there is a "right" way), because ideally you would find the expected utility of that equity. What I mean is that a scenario with a 100% chance of making $10 million and a scenario with a 10% chance of making $100 million and a 90% chance of making $0 hace the same expected value. However, many people will be happy to retire on $10 million or $100 million - so a 10% chance of retiring is a much worse option than a 100% chance of retiring even though they have the same expected value (the guaranteed money has a much higher expected utility).

ska 5y ago
Sure, but that's why I said compare to other opportunities and repeat. But you are right, I should have said "a better way". EV works ok at the beginning to sanity check, because you have very little info, and honestly unlikey enough to do a utility comparison on two similar offers. EU is really hard to even estimate here. If you truly value equity at $0, why accept it at all? Fwiw I've seen this experiment done with founding engineers, offer a sliding scale of salary and equity, in bounded ranges. 100% of people in that case (small sample) took some equity in exchange for a bit lower salary. Obviously they didn't actually value it at $0.
vl 5y ago
EV is a good first step because it’s way easier to calculate than EU. Look at similar companies, do the math, compare to corporate EV and boom - 95% of startup offers are really uncompetitive. Reliable EU calculations are mostly possible for pre-IPO companies, and even then…