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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

by 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

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.