If by "average outcome" you mean "expected value of the utility function", and assuming that my utility-of-money function is sqrt($), I don't need to improve my "average outcome" by more than 6.4% for the deal to be worth accepting; it's enough if I can increase my "average outcome" by 3.2%, since that's how much UTILITY giving up 6% of the MONEY costs me.
For large investment or VC funds, the utility-of-money function associated with any particular investment is almost linear. There's a very good reason for this: As far as Sequoia is concerned, a dollar earned from their Google stock is pretty much equivalent to a dollar earned from their Loopt stock. Not quite equivalent, since there are non-tangible advantages for a VC fund to have many smaller success stories instead of one Google; but close.
As you point out in http://www.paulgraham.com/vcsqueeze.html, founders aren't "rational" in the sense of having the same approximately linear utility-of-money function as VCs: "... letting the founders sell a little stock early would generally be better for the company, because it would cause the founders' attitudes toward risk to be aligned with the VCs'. As things currently work, their attitudes toward risk tend to be diametrically opposed: the founders, who have nothing, would prefer a 100% chance of $1 million to a 20% chance of $10 million, while the VCs can afford to be "rational" and prefer the latter."
There's another reason to think that most people have concave utility-of-money curves: The insurance industry. If you buy house insurance, you are lowering your expected number of dollars (because even ignoring market friction, the insurance companies have to make a profit), but raising your expected utility.
- that for essentially all startup shareholders, the present hope of future utility varies linearly with the number of shares, and
- that the utility function for most founders is a step function.
Both sound right to me separately, but don't they contradict each other? Maybe most founders just live with this paradox without realising?
Most startup founders (initially at least) hope to get a few million, and wouldn't risk that to get a few billion. That's the step. And the most common form of liquidity event is a small-scale acquisition that gives the founders just that level of wealth, since otherwise they won't sell. So in the most common (and most commonly hoped for) good outcome, happiness varies linearly with the number of shares.
"So in the most common (and most commonly hoped for) good outcome [...]"
Isn't the omission of good in the first paragraph a lapsus, i.e., do you mean most founders think success is the most likely outcome? Or do you mean founders should ignore the possibility of failure for the purposes of making these decisions about stock?
Seriously, these issues, and a lot of other issues, are covered in "How to Win Friends and Influence People". Read it. If I could figure out a way to get you to feel like you came up with the idea to read it, I would, but I can't, so just read it.
I know I took criticism personally and reacted very badly once or twice in the past, so I see your point. But I realised I was being a baby and grew from the experience. No speech on humility can make you humble. At best, it will convince you you should be humble, and maybe by acting humble some of it will sink in and stick. Real humility comes from realising your mistakes. [Edit:] That's painful at first, but necessary to get over your ego.
[PS: Sorry, I drifted into replying to other comments of yours, and the end result may be confusing.]
Most mature and intelligent people love it when someone is able to offer useful critiques of their work, as long as they're civil about it. For example: http://en.wikipedia.org/wiki/Socratic_method
Seriously, would you want this guy making a few million? Not only would he be a douche, but he'd be a rich douche. Imagine how he'd treat his waitresses and waiters then. Or his local cops. Or anyone not as smart as he is, which is, apparently, EVERYONE. I'd even call him a detriment to our society, because the child just seems to act like a Paris Hilton with brains. Smart people can be civil, and it's just silly to watch everyone go "Cperciva you're so awesome! You should do X with your life!" and him go "Oh ho ho, didn't you think I already considered that? I turned down a headhunter yesterday, in fact. Now go make me a sandwich."
The dude's a genius, but he could learn a little humility. But he's obviously not going to learn until some event wakes him up to it, so I'm done caring that maybe one more nice person could exist in the world.
(Kudos for being able to imagine a Paris Hilton with brains.)
What's depressing is how often people don't think of other people.
I'm not saying being rich would entitle him to any particular behaviour; they're orthogonal things.
About the hypothetical waitress, either she could find another job to pay for college, or otherwise her ability to go to college depends on cperciva getting rich.
There are other examples where you could argue that raw capitalism may not be in the general interest. Think, for example, of real state; that's more of a zero sum game. In my area, rich foreign people are buying most of the real estate for summer houses they'll visit once every other year or so, while locals have a hard time to find a first accomodation due to pumped prices. Many people have to migrate to save up for a house here. Since the utility of that real estate is way lower for the foreign rich than for the local poor, I claim that in this case raw capitalism is reducing overall value.
You'll get rich, and you won't get heckled by a bunch of startup founders.
In any case, finance really doesn't interest me. I routinely tell Wall Street headhunters to stop bothering me because I would rather create something impressive than own something impressive. I'm not in this for the money.
Let's put it this way: How arrogant you are perceived as can be measured by how many times you say "I".
Take, for example, the 50% point. Once you hand over so much stock that the amount you and the people you implicitly trust hold dips below 51%, you've lost control. Clearly an issue outside of the 1/(1-n) equation, and yet not really relevant. Everyone knows this already.
Then there's the general notion of not handing out too much stock to too many factions, but this too is more or less established knowledge amongst the target audience.
Having said that, the nuance of factoring in odds of success is a worthwhile consideration. Hat off for explaining it!
How does that mesh with the fact that a failed startup is probably worthless (in the literal sense that you can't make money from it), and most startups probably have >90% failure rate?
I know there is a learning experience in startups and that working hard on something fun is valuable, so worthless is really just talking about immediate money here.
This isn't as naive as it sounds: If you take VC with standard liquidation preference terms, the company needs to do really well before you get anything back -- so the amount of money you need to avoid "failing" is dramatically increased.
In my case, since I don't intend to take any VC, there's a wide range between "failure" (making less money than I would have earned risk-free by working at the university for the same duration) and "success" (making enough money that I never need to work again).
Also, on a more self-serving note: I'm a heck of a lot more competent than 90% of startup founders. Or even 90% of YC-funded-startup founders for that matter -- and YC-funded startups have distinctly less than a 90% failure rate.
I have no opinion of you or your entrepreneurial abilities in the same way a physicist has no opinion of gravity.
If I can measure what you've done (e.g. in terms of customers, revenues, successful exit sale, etc.) then I'll respect you (or not).
Not to deny this, as I don't know anything about you, but... that is a very bold statement.
Many times people think that they can transfer great success from one domain into other domain. Michael Jordan and his short baseball stint is the first thing that comes to mind.
I work with MDs and PhDs on a daily basis, analyzing their technologies for their start up companies. By far, I am much more willing to put in extra hours for friendly people than those that cram down my throat how much better they are than me.
I've found that the best response is to sit there, listen carefully, take note of any valid points, and ask followup questions if you need more information on one. You may learn something: despite the overall negativity of the conversation, my boss had many points that I'm going to want to keep in mind as we move forwards.
Understand, there is a lot of self-justification going around when it comes to entrepreneurship. As long as rich people are the distant Bill Gateses and Warren Buffets, people can put them up on a pedestal or say "Oh, they got lucky." But if someone you've grown up with or someone who used to work for you gets rich, you have to ask yourself "Why them and not me? Are they just smarter than me?"
Many smart people will do just about anything to avoid admitting that others are smarter than them, so they instinctively say "Oh, he's just going to fail." And when you succeed, they'll say "Oh, he just got lucky." If you succeed again they'll start saying "The game is rigged!".
But if you stoop to their level and say "Oh, look how smart I am, of course I'm going to succeed," you're just engaging in self-justification yourself. And that's a dangerous mental attitude to get into, because it blinds you to details. The reason you're smart in the first place is because you pick up details that other people don't; you can easily become stupid by believing yourself smart. This comes from experience: I did precisely this in high school and college, and then found that when I actually tried to get something done, the results were much more disappointing than I would've liked.
(Therapy for myself: I think you're smarter than me, I think you will succeed, and I think that if you do succeed, it will be because of skill. But keep what I say in mind anyway. It may be useful.)
I have a friend who (years ago) told me "Damn you're lucky! You have a horseshoe stuck up your [butt]. But you seem to work really hard for it..."
I never forgot that, and in the intervening years I've attributed the majority of my success to luck, rather than skill. Luck, however, that I work hard to create.
The reason is this: If you believe that your success is due to your own skill, you become lax. Complacent. Entitled. You've succeeded so far, so clearly you're da man and you should succeed going forward.
If, on the other hand, you ascribe it to luck, you acknowledge that there's little that you did to make it work. And so you have to keep working hard and scrambling to make the next project successful. Because your previous successes have little bearing on future performance.
Very well said.
Remember, whatever disappointments you have, don't come off sounding like this guy (someone who did well in school, but couldn't get hired at the firm he wanted): http://www.autoadmit.com/thread.php?thread_id=445136&mc=...
If not, please don't be "bolder" than this guy: http://en.wikipedia.org/wiki/Ravi_Vakil
Yes, I did.
Just the once, though, huh?
1. Open up Microsoft word.
2. Type all that out.
3. Save it as "Resume.doc"
4. Don't open it again until your next job search.
Seriously, Word?!
http://www.daemonology.net/blog/2006-09-13-encrypted-backup....
This post also shows a phenomenal misunderstanding of what it takes to create a successful software startup:
http://www.daemonology.net/blog/2007-06-21-think-before-codi...
let me know if it's something you're interested in, or if you want to chat about it sometime.
drew (at getdropbox.com)
I think it took several days to move my data to the current system remotely which was not fun. I think its just an unavoidable problem. The severity was lessened by the service calibrating the upload to occur in the middle of the night, which really did help a lot. All of the incremental uploads also are scheduled at night, which is an obvious move.
Edit: That's assuming cperciva has physical access to his server, rather than working with e.g., EC2, or that he has more bandwith to spare.
But anyway, that's why I said if you can improve on their offering then go for it. Given the current options, they're the best that I know of; and I say that knowing that they have a lot to improve. So, if you build a better service, I'd consider switching.
This won't happen to you? Okay. I trust you.
_never confronted by a subpoena_
If you get a subpoena for a passphrase for a client, you will give it up. Yes you will. Now, if someone was holding terroristic bombcodes or whatever and REALLY didn't want people getting them, they ain't backing up anything online. The same people who need real security aren't going to be uploading their data anywhere .
"If you get a subpoena for a passphrase for a client, you will give it up."
Not if I don't have it. This is the point of strong security -- you don't NEED to trust me, because I am not technically capable (nor, unless I'm quite mistaken, is the NSA) of decrypting data backed up using tarsnap.
I'll be glad to discuss this remote secure backup project with you. It was once on top of my list for a DIS application, but I dropped it for various reasons that I would be glad to share with you.
If yes, I've improved your life -- they use my delta compression work (bsdiff, originally written as part of FreeBSD Update) to reduce the size of updates which have to be downloaded. As of about a year ago, my work had saved users around the world well over a hundred years of waiting for updates to download.
This is not to belittle, just to put your "100 years" in context. It's great work and you've saved me personally a lot more than 5 minutes.
The math equation is correct, but the likely outcomes are nearly impossible to estimate. I have been on the management team of 5 startups and advised many others. There are some "norms" and guidelines for how much to raise at each stage, how much equity to give up, and even how much stock to grant employees as you grow the company.
I wrote an in depth blog on these questions, too long to detail here, but Paul is on the right track. For more details see How much Equity for Investors and Employees?
http://dondodge.typepad.com/the_next_big_thing/2007/08/how-m...
Suppose, as a simple example, that I have a startup which I think has a 50% chance of succeeding and being sold for $1M, and a 50% chance of failing and being worthless. Now suppose that Paul selects me to participate in YC, but wants 10% of the company, and I think his help will leave the potential valuation unchanged but increase the chance of success from 50% to 55%. If I accept his offer, my EXPECTED return drops from $500k (50% of $1M) to $495k (55% of $900k) -- but I'd still accept the offer, because increasing my chance of getting that first $900k is worth far more than getting an additional $100k on top of that.
On the other hand, suppose a venture capital company comes along and offers to help me expand into a much larger market, where I'd have a 10% chance of the company being worth $100M (and a 90% chance of the company being worthless), in exchange for taking 50% of the company stock. If I accept the offer, my EXPECTED return jumps from $500k to $5M (10% of $50M) -- but there's no way that I'd accept the offer, because I really don't want to spend years of my life on something which has a 90% chance of being worthless.
It's important to understand the numbers, but in the end the numbers, at best, have to guide you rather than making decisions for you.