5 ms·

The downside to failure is exceptionally low. It's all other people's money... Oh my!

• deleted 13y ago
  [deleted]
• nl 13y ago
  It's easy to pull a quote like that and make it sound like a moral failing. If you read the comment it's quite smart observation: 1% odds in an even game suck; 1% odds where you're given your wager by someone else and you get to keep 50% of the upside and the upside is potentially 10000:1 is pretty awesome. The fact is is someone else's money directly modifies the costs to you, and therefore changes the risk/reward calculation. There is no implication that you wouldn't work as hard simply because it isn't your money.
  • crntaylor 13y ago
    You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else? The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard http://en.wikipedia.org/wiki/Moral_hazard
    • Anderkent 13y ago
      I can't see how that's a bad thing in this context. The investor is fully aware that you'll take risks with his money - he's hoping that one of these risks will pay off hugely, if not with you then with some other startup he's invested in.
    • LBarret 13y ago
      It works like this because most investors prefer winning 100x their investment 1% of the time. Business angel are a bit different but VCs really think that way.
    • nl 13y ago
      I understand many on HN aren't particularly keen on getting a job with a normal wage, but saying that is a moral hazard is pretty extreme. Re-read the comment. An early employee is paid a salary, and they also get options. The OP's point is that receiving the salary and options means your risk profile is different. There's no moral hazard here, unless you believe receiving a salary is a moral hazard.
    • erichocean 13y ago
      you'll certainly take more risks if you don't experience the downside The entire reason VCs give you the money is to take more risk. That's, literally, the point. So you do understand things correctly, yet came to the wrong conclusion that VC were somehow being wronged by this.
    • rdl 13y ago
      If you had a machine which would charge $1 for a 1% chance of winning $1000 in 1 year, you could fairly charge people somewhere between $5 and $9.50 per pull of the handle. You'd have an exceptionally long line waiting for that deal. The whole point is rich people, investment portfolios, etc. have an entirely different risk profile than individuals. For an individual, low-probability high EV (high variance) is dangerous, which is why you buy insurance -- essentially negative EV (a 100% chance of losing either $1 or $2, but not losing your $1000).
    • CapitalistCartr 13y ago
      Taking a crazy risk is what the VC is paying you to do. If it didn't take a crazy idea to make it big, everyone would see it, and many would be doing it. From the point of view of the VC: how much of your net worth would you bet on a 1% chance of a 10K payout, if you cold make dozens of such bets?
• crntaylor 13y ago
  The investment banking industry basically invented the concept of OPM (other people's money) in the 1980s (okay, I'm sure it existed before that, but the 1980s was when it became a buzzword). A great read if you're interested in learning more about the history and operating procedures of the sales & trading side of investment banking is Traders, Guns and Money by Satyajit Das. Its sections on credit default swaps and collateralized debt obligations are particularly interesting when you consider that they were written in 2006, pre-crisis (around the same time that Leveraged Sell Out was getting started, in fact).