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It's more clear if you read his follow-up to the post. (http://www.peteradkison.com/blog-entry-3-wizards-of-the-coast-equity-distributions-part-2/ http://www.p

by patio11 13y ago

It's more clear if you read his follow-up to the post. (http://www.peteradkison.com/blog-entry-3-wizards-of-the-coast-equity-distributions-part-2/ http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas... <-- highly recommended) What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares, at valuations between $0.50 and $4, diluting the founders horribly, because the founders did not award themselves new shares. The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. For example, if you had hypothetically bought them a drafting table for $100 (an example used later), you ended up with a 0.5% stake in the company (implicitly valuing the company at $2k at that point). A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. If you attempt to invest in them later, after they have e.g. a product with customers for it, the value gets re-pegged SHARPLY north of that, perhaps in the single digit millions or higher if they're doing really well. He mentions that a lot of the money men involved were annoyed by hordes of small investors making seemingly outsized returns on their initial investments. I don't think he quiiiiite understands that they're not wrong: their outsized returns were essentially large gifts of surplus value from the founders to them. (The money men, of course, seem a little put out that the founders didn't instead make a large gift of surplus value to them.)

cperciva 13y ago
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices. Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's no way I'll issue new shares for $0.50 each. ;-)
- patio11 13y ago
  I would certainly not suggest giving away those 100 common shares for picodollars because that would compromise your business results and make it affirmatively more difficult for sophisticated investors to join you, leaving your company to only receive investment from worse investors. By the way, I signed up for Tarsnap and am using it "in anger" for Appointment Reminder. My predicted bill for this month is something on the order of 60 cents. It is, literally, the smallest business oriented bill I have ever forced my accountant to look at, and would fall below the noise floor but for the fact that I want paper records of me having paid for a professional backup service in case I ever have to prove this for my insurance agency. (I have professional liability insurance and data loss/data breach insurance for Appointment Reminder, chiefly because I have hospitals as clients and they want to know that if I screw up there will be deep pockets in the neighborhood to sue to settle up with. The insurance company is basically renting their deep pockets out on a "We are willing to bet that you won't screw up" basis, but to protect their interests, they have a 15 point checklist for various things Serious Businesses do regarding data security and if it turns out that I'm not a Serious Business than my Serious Business Insurance Policy will not actually cover me.) I would, and this is my honest and true opinion as a customer rather than as someone who has nagged you for years to raise your prices, prefer to pay $100 per month for no reason other than to avoid having my insurance company think that I am a stupid kid playing at being a real business by entrusting core parts of my infrastructure to a service which costs me sub-coffee money. In the event of me having an insured loss (which, n.b., I hope to never have and to just set fire to the $10 a day I pay for insurance), I really don't want to have that conversation. Please make me not have to have that conversation. I can pay.
  - jacquesm 13y ago
    Thank you.
  - bigiain 13y ago
    Let me introduce you to "Bigiain's Managed Tarsnap Backup Service" - for the low low monthly fee of $99.40 (on top of Tarsnap backup charges), we'll provide you with a professionally monitored, secured, authenticated, managed, and 100% guaranteed digital _and_ paper invoicing service - complete with 99.999% SLAs on the invoicing and _punishingly_ punitive guarantees of eventual consistency in your long term invoice and payment ledger. (Call now, our operators are standing by…)
bennyg 13y ago
> A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. Here's what I don't understand. Why?
- patio11 13y ago
  There's a market between sellers of equity in early stage companies and buyers of equity in early stage companies, and sellers in that market largely will not transact with you below $250k, because they'll have better offers for their scarce product. (This assumes, naturally, that the founders appear to have a credible chance of bringing a technology product to market.)
  - bennyg 13y ago
    I have a great product, have quite a few people that use it, and would kill to have $250k in venture money to take it to the next level. I'm just in Alabama - and that's why $250k seems like such a high number for a napkin idea (I can't tell you how many napkin ideas I have). $250k is a TON of money if you don't need to hire anybody.
    - patio11 13y ago
      You don't get $250k in exchange for the napkin. You'll be able to possibly convince someone to pay $25k for ~9% of the napkin, contingent on you devoting the next months/years of your life to exploring napkin-like directions until it either burns or blossoms. (If you already have a product with revenue/traction, there's plenty of reasons to counsel AGAINST taking the money at those terms, by the way. Or any terms, for that matter.)

by patio11 13y ago

cperciva 13y ago

The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices. Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's no way I'll issue new shares for $0.50 each. ;-)

patio11 13y ago
I would certainly not suggest giving away those 100 common shares for picodollars because that would compromise your business results and make it affirmatively more difficult for sophisticated investors to join you, leaving your company to only receive investment from worse investors. By the way, I signed up for Tarsnap and am using it "in anger" for Appointment Reminder. My predicted bill for this month is something on the order of 60 cents. It is, literally, the smallest business oriented bill I have ever forced my accountant to look at, and would fall below the noise floor but for the fact that I want paper records of me having paid for a professional backup service in case I ever have to prove this for my insurance agency. (I have professional liability insurance and data loss/data breach insurance for Appointment Reminder, chiefly because I have hospitals as clients and they want to know that if I screw up there will be deep pockets in the neighborhood to sue to settle up with. The insurance company is basically renting their deep pockets out on a "We are willing to bet that you won't screw up" basis, but to protect their interests, they have a 15 point checklist for various things Serious Businesses do regarding data security and if it turns out that I'm not a Serious Business than my Serious Business Insurance Policy will not actually cover me.) I would, and this is my honest and true opinion as a customer rather than as someone who has nagged you for years to raise your prices, prefer to pay $100 per month for no reason other than to avoid having my insurance company think that I am a stupid kid playing at being a real business by entrusting core parts of my infrastructure to a service which costs me sub-coffee money. In the event of me having an insured loss (which, n.b., I hope to never have and to just set fire to the $10 a day I pay for insurance), I really don't want to have that conversation. Please make me not have to have that conversation. I can pay.
- jacquesm 13y ago
  Thank you.
- bigiain 13y ago
  Let me introduce you to "Bigiain's Managed Tarsnap Backup Service" - for the low low monthly fee of $99.40 (on top of Tarsnap backup charges), we'll provide you with a professionally monitored, secured, authenticated, managed, and 100% guaranteed digital _and_ paper invoicing service - complete with 99.999% SLAs on the invoicing and _punishingly_ punitive guarantees of eventual consistency in your long term invoice and payment ledger. (Call now, our operators are standing by…)

bennyg 13y ago

> A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. Here's what I don't understand. Why?

patio11 13y ago
There's a market between sellers of equity in early stage companies and buyers of equity in early stage companies, and sellers in that market largely will not transact with you below $250k, because they'll have better offers for their scarce product. (This assumes, naturally, that the founders appear to have a credible chance of bringing a technology product to market.)
- bennyg 13y ago
  I have a great product, have quite a few people that use it, and would kill to have $250k in venture money to take it to the next level. I'm just in Alabama - and that's why $250k seems like such a high number for a napkin idea (I can't tell you how many napkin ideas I have). $250k is a TON of money if you don't need to hire anybody.
  - patio11 13y ago
    You don't get $250k in exchange for the napkin. You'll be able to possibly convince someone to pay $25k for ~9% of the napkin, contingent on you devoting the next months/years of your life to exploring napkin-like directions until it either burns or blossoms. (If you already have a product with revenue/traction, there's plenty of reasons to counsel AGAINST taking the money at those terms, by the way. Or any terms, for that matter.)