

Why I decided to take the money and sell my startup - rmason
http://www.entrepreneur.com/article/220375

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jcc80
"Too many founders let emotions and egos cloud a decision that is really a
number crunch. Once you accept that there will always be richer and wiser
people out there, you'll find that they didn't get that way by taking dumb
bets."

Maybe I'll always live in a crummy apartment and have Ramen for Thanksgiving
but I completely disagree with this. How I choose to spend the next 3 years of
my life is hardly just a number crunch. How I spend time doesn't just have a
numeric value attached to it. I respect the author's analysis and to each his
own. But, for me it's much more about learning, growing and building than a
straight math problem. If at the end I don't die with the most toys I'm really
OK with that.

~~~
aptwebapps
Well, if you're so inclined you could use part of the 500k to bootstrap
another projcet and continue your happy startup existence only with less
Ramen. (Unless you just really like Ramen, of course).

~~~
0x12
This is true, but a live one in the hand may be worth more than $500K in the
bank. It all depends on your own estimation of the probability of eventual
success, and your ability to accurately make that estimation in the first
place.

~~~
jcc80
Exactly - at least for me. Emotion has to enter into it because it's about
whether you're ready to move on when the money makes it a fairly close
decision like this.

------
Murkin

      "When logic clouds reason"
    

Lets take this up a notch. If a open a startup today, statistically my chances
of a $500K exit in two years (like his) are pretty slim. Lets say 20% ?

So, if I go for it I have a projected $50K/year for next two years. Or, I can
go work somewhere and get $100K/year.

Ergo, starting a startup is foolish.

Anyone hiring ?

~~~
brousky
Is doing a startup foolish? If you're doing it as a way to earn a better
living, it certainly is!

It's all about thresholds. With anything between a decent and really good
salary (say 75k to 200k), your life is pretty much the same except for the
level of luxury in what you own. You still have a mortgage to pay and if you
lose your job, you need to find a new one very soon or you'll be draining your
savings and defaulting on debt payments within a few months.

If someone offers to buy your startup and that would get you over a major
threshold (eg. clear the mortgage and debts, enough cash left to carry on
current rate of spending for a couple years), it would be foolish not to take
it, especially if you have kids. Get a bit of rest and aim for the higher
thresholds on your next startup.

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rohit89
Ok, so here's a question I've had for a while. I was wondering if I should do
a Ask HN for it, but I'll ask it here for now.

What do you do when offered money for a slightly profitable service that has a
small but loyal customer base ? This is in the event that your service will be
shut down after acquisition. The math points to taking the deal but it doesn't
seem a very nice thing (to me at least) to pull the rug on your customers.

Has anyone had to face decisions of this sort or known someone who has had to
? How did you/they go about it ?

~~~
consultutah
It is a personal question: which is more important to you? Keeping the loyal
customers happy or the thrill or the exit, the money, etc.

The important thing to remember is that there is no right answer. This is real
life, you aren't required nor expected to be altruistic, but you can be if
you'd like.

------
BerislavLopac
Actually, our MBA completely botched the risk portion of his calculations,
which are built on a completely incorrect premise. The 20% probability of
getting $2.5M does not translate to 100% probability of getting 20% of that
amount, i.e. $500k.

He wrote: "Let's see how you, the founder, should make out if successful."
This means that the whole scenario depends on the plan succeeding, so his
calculating the risk-adjusted return is incorrect. If successful, the founder
will get $2.5M; if not, he'll get anything from 0 to that amount. Also, there
is a non-zero chance that the company will be worth $100M after three years;
shouldn't that be included too?

------
JoshTko
This analysis makes a few assumptions which are wrong. The consideration of
20% VC back startup success rate is an pure investment analysis. This is the
consideration if you are Sequoia, not if you are the founder.

As a founder you have far more intimate understating of your company and would
be far better positioned to determine what the probability of success is.
While founders may seem overly optimistic, they are not a stupid bunch and
should be able to make objective analyses, especially if they were able to
build a company that has attracted VCs.

So if you change the 20% success probability to 35% based on the founders
understanding, the risk adjusted return would be 852K. Additionally a 10%
probability of selling at $10 million would increase the founder’s share by
another 500k on top of the 852K. For these reasons the author is simply wrong
in his financial analysis. Statistical averages are inappropriate for one off
situational analysis. Why would a founder use the 20% industry average success
rate when they would be far more informed than an outside investor?

Additionally an entrepreneur has other considerations such as ability to start
another valuable company, how much they enjoy the work, if they are in a new
technology space and have a 0.1% chance of building a billion dollar company,
or the social perception for a CEO of a startup. These are considerations that
a VC does not really care about and will not model.

The author sounds more like a VC making a routine investment analysis than an
entrepreneur that was betting their future trying to build a company that they
are passionate about.

------
dr_
When you start your company, you think of it as an innovative product, not a
probability. If you start thinking of it in terms of probabilities from the
very beginning, you are not going to succeed.

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andrewljohnson
Are those examples at the end his?

He totally dismisses Groupon's rejection of Google's offer, when there were
almost certainly some sort of earn-out. I'm sure if Google were offering $8B
in cash with no performance requirements, they would have taken the money. But
that's not how deals work, and Groupon could very well have decided an IPO
would lead to a much surer return.

I would expect a less shallow analysis from a finance guy.

~~~
p4r4d0x
>He totally dismisses Groupon's rejection of Google's offer

He doesn't totally dismiss it - his reaction was provocative but much more
measured than "totally dismissed". For reference:

"Will the public market tip the deal in Groupon's favor, or will Mason--like
many of his would-be customers--wish he had bitten on that offer?"

------
eliot_sykes
Would be interesting to hear from HNers who made a similar decision to take
the money now and how that panned out.

------
JoachimSchipper
Also, note that the value of money is not linear: I'll take $500k over a 50%
chance of $1M. In fact, I'll happily take $400k over a 50% chance of $1M.

(Interestingly, I seem to recall some research that showed that, essentially,
owners of big companies tend to refuse $600k over a 50% chance of $1M.)

~~~
JoeAltmaier
TRue. Add to that, reality is a distribution of outcomes, not just a single
percent chance. Nobody's mentioning the 'tail of the curve' where you make $1B
in 7 years. And everything in between. Integrate P(evt)*Yield(evt) over all
outcomes for a real valuation.

------
jannes
Anyone else who doesn't understand his example? If my company is valued at $1M
and someone invests $1M in it, why do I still own 50% of the company after the
investment, as the author said? Doesn't this mean the company is actually
valued at $2M?

~~~
ColinWright
Suppose your company is valued at $1M, and you own all of it. Your holding is
worth $1M. Obviously.

Suppose now someone comes along to invest, and they put in $3M to the company.
What percentage equity should you each now hold?

Simplistically, your holding should still be worth $1M, and their holding
should be worth $3M. The company is now worth $4M, comprised of the $1M it was
worth to begin with, plus another $3M in cash (or promises or whatever). You
should have $1M of that, so now you own 25% of the company. The investor
should have $3M of value, so they own 75% of that $4M total.

So on the surface, neither of you have gained. Except now the company has a
shed-load of money, and so it can invest and trade more aggressively, thereby
increasing its value. As a result, the company increases in value, and your
25% holding goes up in value.

Pretty much all trades and investments can be assessed like this, but with
some refinements, in particular, factoring in the expectation of success.

Consider pitching for an investment. You value the company at $1M, you want
$500K, so after the investment the company will be worth $1.5M and you will
own 67% of that. Based on that assessment, you should be offering 33% equity
for that $500K. But the investor will disagree with your assessment, saying
that the company is now, currently, before investment, as not worth $1M.
Perhaps they will say that without investment your company is only worth
$500K. As a result, post-investment your company is worth $1M and you should
each get half the equity. The gain for you both is that now, with the cash
(and possibly expertise) of the investor, perhaps the company really is now
worth $1.5M, so your 50% is now worth $750K, and the investor has immediately
gained $250K (on paper).

The mis-match in the assessments of an owner and a potential investor is an
area of considerable research and discussion, sometimes heated, but the above
(very simplistic) analysis is a useful starting point. It largely matches the
analysis he gives about selling to a competitor at $500K versus taking
investment at $500K hoping to grow the company to $5M (giving him 50% of that,
with a 20% chance of succeeding, making it worth an expected $500K)

------
rmason
GiftZip is one of the first companies to graduate from the City of East
Lansing's technology innovation center (TIC). The TIC also houses The Hatch
which is a student incubator run by Michigan State University.

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markkat
Or factors other than money matter. If you really just want to make money, I
think startups are a crazy idea.

