3 ms·

What you've said could also be summed up as the difference between 'dumb money' and 'smart money'. The latter might be more 'expensive' but also more valuable.

by amirmc 14y ago

What you've said could also be summed up as the difference between 'dumb money' and 'smart money'. The latter might be more 'expensive' but also more valuable. I disagree with your TLDR. There's definitely something worth seeing here as Chris has just described a fundraising tactic that's useful to be aware of (it's not one I'd have thought of independently).

RyanZAG 14y ago
My TLDR didn't imply that the decision or discussion wasn't important - choosing the equity structure is an incredibly important part of any business. Using the valuation number to try and buy skills and experience is novel (I think?), but the underlying idea is very much not novel. When you hire an engineer, you can either pay him $100 or give him $100 worth of stock. If the engineer chooses to be paid $100 in cash, you need to acquire that cash. If you have revenues, you can pass those onto the engineer. If you don't, you can sell $100 worth of stock, and pass on that $100 to the engineer. Valuations are identical - you are selling off the stock for cash - it is identical to the case above when distilled, and the actual choices involved are the same. Example: Option A Investor 1 who will give $100 in exchange for $100 stock Investor 1 will not help the company recommendations etc. Option B Investor 2 who will give $50 in exchange for $100 stock Investor 2 will get you a meeting with Investor 3 (X) Investor 2 will help you with his experience (Y) The above Option A and Option B is directly equivalent to the engineer dilemma above. You need to take Option B only if Value(X + Y) > $50
- gregpilling 14y ago
  OPTION C Investor 1 who will give you $100 in exchange for $100 stock Investor 1 is a good person who cares about your startup and helps with his/her experience.
  - RyanZAG 14y ago
    Helps to consider the different valuations at play here: Real value of your company - This one can only be found by using a time machine to jump forward and see the true cashflows. - It is the true value that the other values try estimate. Your estimate of the value - You get this by being objective about your business. - You should base all your decisions off this number. Other people's valuations of your business - Everybody has their own unique value - You don't want to sell stock to people who have a low value of your business. So obviously, there is not just option A and B, there are many different options based off other people's valuation of your business. There is another factor too, as you brought up, in that you can receive a sales discount - 25% off - with that 25% off either being in free work for your company, or in a plain 25% better offer than they really want to offer. This happens in the same way an orange store may sell oranges for 25% less than their competitor across the road, even if the oranges come from the same farm. The only important number is your own estimate of the value, and you should base all share decisions off that number alone. And try to get that number as close to the real value as possible. So if there is an Option C which is just plain better than the other options, it's the obvious choice to take - but be careful of any strings that may come attached in lieu of a cash payment - he may be expecting bigger rewards in future and can cause drama in your business getting them. Not everything with no cost is free...

by amirmc 14y ago

RyanZAG 14y ago

My TLDR didn't imply that the decision or discussion wasn't important - choosing the equity structure is an incredibly important part of any business. Using the valuation number to try and buy skills and experience is novel (I think?), but the underlying idea is very much not novel. When you hire an engineer, you can either pay him $100 or give him $100 worth of stock. If the engineer chooses to be paid $100 in cash, you need to acquire that cash. If you have revenues, you can pass those onto the engineer. If you don't, you can sell $100 worth of stock, and pass on that $100 to the engineer. Valuations are identical - you are selling off the stock for cash - it is identical to the case above when distilled, and the actual choices involved are the same. Example: Option A Investor 1 who will give $100 in exchange for $100 stock Investor 1 will not help the company recommendations etc. Option B Investor 2 who will give $50 in exchange for $100 stock Investor 2 will get you a meeting with Investor 3 (X) Investor 2 will help you with his experience (Y) The above Option A and Option B is directly equivalent to the engineer dilemma above. You need to take Option B only if Value(X + Y) > $50

gregpilling 14y ago
OPTION C Investor 1 who will give you $100 in exchange for $100 stock Investor 1 is a good person who cares about your startup and helps with his/her experience.
- RyanZAG 14y ago
  Helps to consider the different valuations at play here: Real value of your company - This one can only be found by using a time machine to jump forward and see the true cashflows. - It is the true value that the other values try estimate. Your estimate of the value - You get this by being objective about your business. - You should base all your decisions off this number. Other people's valuations of your business - Everybody has their own unique value - You don't want to sell stock to people who have a low value of your business. So obviously, there is not just option A and B, there are many different options based off other people's valuation of your business. There is another factor too, as you brought up, in that you can receive a sales discount - 25% off - with that 25% off either being in free work for your company, or in a plain 25% better offer than they really want to offer. This happens in the same way an orange store may sell oranges for 25% less than their competitor across the road, even if the oranges come from the same farm. The only important number is your own estimate of the value, and you should base all share decisions off that number alone. And try to get that number as close to the real value as possible. So if there is an Option C which is just plain better than the other options, it's the obvious choice to take - but be careful of any strings that may come attached in lieu of a cash payment - he may be expecting bigger rewards in future and can cause drama in your business getting them. Not everything with no cost is free...