
Thinking of working for a startup? Understand this first... - Sam_Odio
http://weblog.raganwald.com/2005/03/are-you-thinking-of-working-for-start
======
pg
You can't quite treat the company as being worth the post-money valuation
after a VC round. Angels would pay way more than 1% of the pmv to buy 1% of a
company Sequoia had just backed. What they'd pay is the market price.

~~~
raganwald
If you're saying that AFTER Sequoia has backed a company, on some later,
subsequent round people will pay more, I agree that is supposed to happen.

But that doesn't mean the company was worth more at the moment Sequoia
invested. I think the key difference between your means of valuation and mine
is that I don't believe that the "market" is meaningful until the founders'
equity is liquid.

The "market" is only a useful guide where there is a meaningful correlation
between the "market' and the eventual, risk-adjusted value of the company when
it becomes liquid.

In that respect, I believe that the VC PMV is a better indicator of the risk-
adjusted Present Value of the company.

VCs spend an awful lot of time and effort researching price, and they don't
seem to be paying a huge discount to the risk-adjusted PV of companies they
back.

The plural of anecdote is not "data," however what I understand is that Angels
as a whole are an unreliable indicator.

YMMV, but if someone is telling you "We paid a dollar, but it's really worth
two," I would keep my wallet locked in a safe.

~~~
paul
I would pay more at the moment Sequoia invested. There are a few reasons:

\- They have a record of picking winners

\- They probably invest at a lower price than other VCs (because people would
rather have them as their VC)

\- The odds of success are improved due to the credibility and connections
provided by Sequoia.

It would basically be a cheap way of getting in on their fund, assuming the
premium wasn't huge.

~~~
raganwald
What can I say, except "carry on, it's your money!"

But whether you would pay more or not, the subject was contemplating
employment with a company and valuing stock options.

Never mind generalities. If Sequoia have a wonderful track record for picking
winners, I offered another means of calculating the value of the stock based
on the likelihood there would be a liquidity event.

Here's something to ponder: if the industry gets 20% and Seqouia gets 22% of
their investments to a liquidity event, Seqouia is doing fantastically well.
10% better!

But: how much does a 2% difference in likelihood affect the value of the stock
for employees?

Feel free to plug in Sequoia's actual numbers. I think you will find that they
do not underpay as much as you may suppose.

It would basically be a cheap way of getting in on their fund, assuming the
premium wasn't huge.

I would love to get in on their fund as well. But my post wasn't about
investing, it was about valuing stock options so you could understand what
they are worth on a risk-adjusted basis.

What's the difference?

Remember, when you invest alongside them you get all sorts of extra rights
like double dips, convertible shares, preferred, and a zillion other ways to
get money in situations at the expense of founders.

This is why it is very important not to assume that just because a name brand
VC invests in a company that employee options or founder shares are somehow
worth as much as you might pay for those same shares if you are the same VC.

If anything, employee options are worth much, much less, because VCs can get
some of their money back if there is a modest wind-up or merger, whereas
employees only cash out if there is a major event.

------
far33d
I think paul bucheit's post <http://paulbuchheit.blogspot.com/2007/03/equity-
math-for-startups.html> is a much more clear explaination of the same
concepts.

