a day ago
- The core test for giving up equity is whether the remaining (100-n)% stake becomes worth more than the whole company before the trade.
- The formula 1/(1-n) determines if a deal is good: the company must become worth more than that factor after the trade.
- For example, Y Combinator's 7% funding is worthwhile if it improves the startup's outcome by more than 7.5%.
- Top VC firms like Sequoia taking ~30% can be a bargain if they improve prospects by >43%, but such deals are rare.
- For hiring employees, the required equity n is derived from n = (i-1)/i, where i is the expected improvement in company outcome.
- Salary and overhead costs should be converted to stock by multiplying annual cost by 1.5, based on startup growth dynamics.
- The company should also factor in a profit margin (e.g., 50%) when determining an employee's stock grant.
- This equity equation applies to any decision involving equity, ensuring the founder's remaining shares become more valuable.