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How are you valuing equity shares? Presumably you're looking at absolute percentages, but remember equity is impossible to value without putting a valuation on

by abalone 12y ago

How are you valuing equity shares? Presumably you're looking at absolute percentages, but remember equity is impossible to value without putting a valuation on the company itself. 0.5% of a company with great product, great team, great opportunity, great go-to-market is definitely worth more than 5% of a company without those things. If you're saying that AngelList doesn't have those kind of companies, then ok, that's logically consistent. But don't make the mistake of eyeballing ranges based on absolute equity percentages alone.

001sky 12y ago
As a general thought, you should only value cases of equity when the company is $100MM + up in exit mode or your have more than fractional percentages. I think that's what the earlier poster was trying to communicate. Almost more important: in the 9 of 10 chance that the company fails, what is being done to maximize the marketability of the staff? YC adds a lot of brand value to "failed" projects. Just one example of how the whole picture needs to be taken into account. If you lose $15K a year taking a haircut, but your next job search sees $30K in extra value from your past experience, how does that add up?
- abalone 12y ago
  If that were true then angel investment would never make sense. In practice, you can value equity at any stage of a company. What matters is the company and its potential, not just the percentage.
  - 001sky 12y ago
    Not sure I follow you. Angel investing may or may not make sense (for the average punter). But for those who do it sucessfully, it seems rare to take <fractional> percentages. Maybe you can give some worked examples using math? I've updated my comment to be more clear below: As a general thought, you should only value [as part of your employment] cases of equity when [either, (a)] the company is [potentialy worth] $100MM + up in exit mode; or [b] your have more than <fractional> percentages [ie, granted stakes >1%]. In other words, unless you expect the stake to be worth a substantial six-figure sum. In order for this to be true, the equity stake needs to be in the upper six figure under some reasonable probability. So, a 600k stake with a 1/3 chance of you "winning" it is only worth $200K. Once you spread this out over the time to get it, it boils down to a number closer to say 50k/year for 4 years. Now, that is a nice bump in salary. But in order to get this in a realistic sense with a 0.6% stake, you need a 1 in 3 chance of exiting out of a $100 million dollar company. Since a 1/3 chance of a 100 million exit is unrealistic for an average portfolio company, you need to correct the math a bit more. Since a 1/10 chance is a more likly number, lets divide our $50k/ye by 3, and we get something in the $15 to $20K range per year. In other words, we get a number which is about a 10-12% boost on a $150K base salary. This is nice, but not worth taking larger paycut/mispricing for. So using this back of the envelope framework, small fraction percentages of ownership don't as a rule compensate for salary mispricing, when that mis-pricing is order of magnitude 10% or greater. Which just brings us back to the initial point but hopefully with more clarity.

by abalone 12y ago

001sky 12y ago

As a general thought, you should only value cases of equity when the company is $100MM + up in exit mode or your have more than fractional percentages. I think that's what the earlier poster was trying to communicate. Almost more important: in the 9 of 10 chance that the company fails, what is being done to maximize the marketability of the staff? YC adds a lot of brand value to "failed" projects. Just one example of how the whole picture needs to be taken into account. If you lose $15K a year taking a haircut, but your next job search sees $30K in extra value from your past experience, how does that add up?

abalone 12y ago
If that were true then angel investment would never make sense. In practice, you can value equity at any stage of a company. What matters is the company and its potential, not just the percentage.
- 001sky 12y ago
  Not sure I follow you. Angel investing may or may not make sense (for the average punter). But for those who do it sucessfully, it seems rare to take <fractional> percentages. Maybe you can give some worked examples using math? I've updated my comment to be more clear below: As a general thought, you should only value [as part of your employment] cases of equity when [either, (a)] the company is [potentialy worth] $100MM + up in exit mode; or [b] your have more than <fractional> percentages [ie, granted stakes >1%]. In other words, unless you expect the stake to be worth a substantial six-figure sum. In order for this to be true, the equity stake needs to be in the upper six figure under some reasonable probability. So, a 600k stake with a 1/3 chance of you "winning" it is only worth $200K. Once you spread this out over the time to get it, it boils down to a number closer to say 50k/year for 4 years. Now, that is a nice bump in salary. But in order to get this in a realistic sense with a 0.6% stake, you need a 1 in 3 chance of exiting out of a $100 million dollar company. Since a 1/3 chance of a 100 million exit is unrealistic for an average portfolio company, you need to correct the math a bit more. Since a 1/10 chance is a more likly number, lets divide our $50k/ye by 3, and we get something in the $15 to $20K range per year. In other words, we get a number which is about a 10-12% boost on a $150K base salary. This is nice, but not worth taking larger paycut/mispricing for. So using this back of the envelope framework, small fraction percentages of ownership don't as a rule compensate for salary mispricing, when that mis-pricing is order of magnitude 10% or greater. Which just brings us back to the initial point but hopefully with more clarity.