
What's the lowest offer you'd take? - bhb

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bhb
We're working hard on finishing up our YC application, and we're having a lot
of problems with this one:

"If one wanted to buy you three months in (August 2007), what's the lowest
offer you'd take?"

First of all, what if we're not particularly interested in selling the company
that fast? Should we just put some ridiculously high number that no one would
actually pay?

Also, the numbers would seem to vary significantly depending on the details of
the acquisition. Are we getting jobs at the purchasing company with good
salaries, stock, and creative freedom? Or are we getting some lump sum? Should
we put different numbers for different situations?

But assuming we knew we wanted to sell and knew some specifics of the deal,
it's still hard for me to come up with hard numbers. Should I base it on how
much money we think the product will make? Or perhaps how much money we want
to have in the bank to fund future startups? Or on the estimated value of our
assets after three months?

How are you approaching this question? What factors are you considering? Any
help is appreciated.

~~~
sethjohn
A good way to start might be the rule of thumb that startup investors
typically want a 10x return on their money (for companies that succeed). If YC
invests $20K in your company in return for 6% of the company, and the company
sells for 3.3 million, they get 200K.

Our three founders came up with a number in our own heads, then we agreed on
something in the middle...which turned out to be pretty close to 3 million.

As to the question of whether to sell so soon, my personal feeling is that
selling soon in a case like this would be a fantastic deal. Each founder would
walk away with $1M, and the experience of being a successful entrepeneur.
Next, take 100K and throw a tremendous party, take another 100K on go on a
ridiculous vacation...then get back to work with the $800K you have left over
and start up your next company!

~~~
jadams
Er. I recommend not immediately pissing away $200K, but that's just me. If
you're in your early 20's, a $200K investment could easily be $1M by your
thirties.

Taking a $1M lump-sum means never having to work again. That's not to say you
won't work again, or won't be productive again. But I'd feel really stupid if
at some later date I _had_ to take a job, just because I pissed away my
capital.

~~~
herdrick
"Taking a $1M lump-sum means never having to work again."

Sorry, no.

~~~
jadams
Well, obviously, this is for some reasonable definition of _have_.

The numbers work for me. I'm married, and have a mortgage.

I guess I was blurring the line between being retired and semi-retired. Were I
to earn such a lump sum, my daily activities would probably look the same. I
just wouldn't be working for anyone else, and wouldn't have that mental burn-
rate / countdown timer going.

Controlling expenses is a very powerful tool. For every after-tax dollar you
save, you're saving like 2 pre-tax dollars. So, it's much more effective to
save $1 than to earn an extra $1.

Here's my mental hierarchy of wealth. Each one represents a drastic change in
quality of life, and options. It's somewhat logarithmic.

1) Stop living month-to-month. I.e. at the end of the month, you have enough
to pay another month's expenses in the bank.

2) Pay of all debt, except mortgage.

3) Stop living year-to-year. I.e. at the end of the year, you have enough
money to not work next year, possibly having to reduce your quality of life,
but not to poverty.

4) Semi-retirement. If you didn't work for the next five years, you'd still
have enough money to start a business at the end of the period.

5) Retirement. You can maintain your current lifestyle, or a slightly scaled-
back one indefinitely. Mortgage is paid off.

6) Rich. Your kids could do (5), if you decided to fund the lazy brats.

7) FU money.

~~~
ralph
Good points, but I'd urge paying off the mortgage before (4). Paying it off
twenty years early saves a wad in the long run. And not having mortgage
payments as a recurring monthly drain makes (4) easier.

~~~
davy
Actually, you are wrong. Why pay off debt that is only costing you 6-odd
percent a year (or less if you managed to refinance a few years ago) when you
could invest that money and average 8-10 percent a year (or better). If you
have enough money to pay off your mortgage, shove it all into the stock
market. You'll come out ahead over the 30 years you're paying your mortgage.

------
imperator
The figure you give depends on your feelings which are created from your
internal and external circumstances. I immidiately asked myself the question,
"What do I want?"

This was my answer: $2,000,000 for property, $1,000,000 for the house (I live
in Silicon Valley), $2,000,000 for traditional reinvestment, $1,000,000 to
start the next company, $6,000,000 total for each partner,

After three months, it depends on where the software is. However, the
purchasing company will be the one evaluating that aspect. For me, it is a
question of what I want versus what they are willing to give in return.

~~~
jadams
You've just listed everything you want out of the future (financially), which
is a different question. Remember, this is for a 3 month investment of time.

So, it's good that you know what you want, but if someone offered to take you
halfway there, would you turn it down? What about one tenth of the way?

Remember, most businessess fail. Yes, that includes yours, and some of mine.
:)

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Alex3917
To valuate your company after three months you have to take two things into
account:

A) How much value will you have created be the end of three months?

B) How much value will you still be able to create?

If you only have enough talent and ideas to last you for three months, you
don't get funded. And if you think you'll have nothing done by the end of
three months (but will still have talent and ideas), you also don't get
funded.

And if you're able to create something of great value after three months but
you'll still have lots of value left to add, then just unask the question
because the answer is irrelevant.

~~~
sethjohn
Perhaps the question is meant to be read as sort of a Zen Koan.

You are asked to present a rational analysis of a situation that, if you think
rationally about it, cannot occur!

~~~
Alex3917
Alex3917 threw his shoe at sethjohn, and sethjohn was then enlightened.

~~~
dfranke
Five pounds of AJAX!

------
pistoriusp
The lowest, R4,000,000 (ZAR), it's about $540,000.

Invested month-to-month at a fixed interest rate of 8% gives you more than
R26,000 ($3,500). After taxes it's roughly R19,000.

I don't know about the USA but in South Africa this is a fairly decent amount
of money to receive each month.

I would use the money to purchase a home and a car (required in RSA) and focus
on my next startup.

Aaagh. No stress. Just fun.

------
blackthorne
I will pull a Zuckerberg and turn down 2 billion

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chandrab
Guys, when formulating your magic number in your head, not forget to include
taxes...that's up to 50% gone right there. So your $1M is now $500K. I speak
from experience on this. It's a good story over a beer.

btw - Did you know the SEC is going to pass a rule that no longer considers
people with $1M in assets "rich", they are changing the bar to $2.5M...this
was in last week's wall st. journal.

This is a tough one to answer since I am committed to my idea, and while money
is important I want to see it through. To an investor though, their goals are
to get out as soon as they can with as much as they can. Obviously you can't
have a $100M company in 3 months, but you could have something that gains
A-round valuations from a VC.

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jward
I'd want to walk away and be able to look someone in the eye and say "I'm a
dot com millionaire." So with the share structure, capital gains tax
(guessing), and exchange rate the number I'd pull out of my ass would be four
million for the whole shot assuming no dilution.

Three months is long enough to know if I really believe in something or not. I
wouldn't sell out on anything I believe in for less than this. If that money
isn't on the table after three months, I can wait and put in the sweat and
time to make it worth that much.

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danielha
As a follow-up question, I think a nice addition for the application would be:
"Aside from what you are currently making, what is driving you to be an
entrepreneur?"

Paul, you mentioned that one of the key characteristics of a good team is
persistence and the unwillingness to give up. When you have no fall-back and
absolutely must succeed, it can be the difference between success and failure.
YC can infer a lot from the rest of the application, but it might be
beneficial for both parties if we were explicit about it.

------
dageroth
I'd say that not the amount of time spent on the development of the software
is the crucial question but the expected earnings. If the idea is really novel
or promising and the expected revenue huge than an investor is paying for the
idea and probably the team and not for the work done in these three months. If
the team consists of gifted inviduals and a great idea than it seems to me not
to utopian to accept only a very high sum because it is rather rare to have a
very promising idea and gifted people together.

~~~
Constantine
I would have to agree, the problem is when you have to self measure a
potential projects earnings before it comes into a large circulation.

I think it would be very easy to over/under estimate a projects worth,
personally I would think that a percentage of profits over a certain period of
time plus a smaller lump sum would be ideal for me.

I am a little new to this game but I would assume it would also increase my
motivation to see a project come to fruition if I had a more longterm stake in
it.

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ced
70K net, if the alternative is a 20% chance of getting rich after a couple of
years. 70K is below YC's average initial valuation, as I understand it. I
wonder how much it would bother them... 70K is enough to live like a student
for 10 years in a low-cost region, to learn and work on just about anything.

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zkinion
Why do you have to take an offer at all? It normally takes anywhere from 1-2
years to make a site successful enough to justify selling for a gargantuan
amount. In 3 months, how much growth can you get to show enough promise of
future growth/monetization?

~~~
pg
Enough, obviously, because we've had several startups that got acquisition
offers after three months.

~~~
ralph
Any takers? I'm not after names, but numbers.

~~~
pg
At that stage they're mostly lowball offers, never more than about 2 million.
No one took one.

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paahijen
Don't quote a number, quote a multiple instead. :-) eg. If XX invests 20k for
10% in your company. their 20k becoming 200k is a good deal which implies
something like 2M for your company (not bad for three months work!)

~~~
paahijen
A follow up thought. This also puts XX (may be YC in this case) in valueing
your company just right! (Ok YC are nice people so thats not a problem, but if
you were asked this question in other context, you better be prepeared!) 'cos
they cannot value your company too low. 'cos even if someone is willing to
give 10x of their investment, you may say "No Deal" and if they value your
company too high (like some VCs do), it almost rules out probability of a
nifty 2M$ acquisition. (This is again from Paul's essays)). It's almost like
RTFM :-)

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prakster
For PG: Paul, if you absolutely have to have this question in the application,
it might help to add the word "cash", e.g. "What's the lowest cash offer you'd
take".

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MEHOM
Making a point that one is thinking about what is their low offer means he/she
is only for short term gains and realizes their idea is not worth that much.

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richcollins
wow I am surprised this has gotten so many comments. Obviously it depends on
the value of the company. If threw together a prototype that hadn't seen a
single user and there was no apparent IP, then 100k would be a ton of money.
If I were sitting on the next YouTube with millions of users added each month,
then 1B+.

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Harj
just my opinion but i'd approach this question more from the angle, what is
the $X I need to have financial freedom. do the math based on the % of the
company you own to work out how much you'd need to sell the company for to
make that amount. $X is going to vary for everyone.

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davidw
[dr evil]One miiiiiiiiiiiiiiillion dollars[/dr evil]

