financiallyanal

Were you the double in all of the movies? If so, did you get contracted with Emma as part of any negotiations, or are doubles negotiated separately?

Ah yes, the frequent flyer card at the hospital ;)

Kidney mckidneyface

Sometimes she goes, sometimes she doesn’t

Dilution in and of itself is not bad though. And if the VC gets in bed with people who go along with poorly handled dilution, then it'll happen in the future, and he'll get screwed again, one way or another.

It boils down to questions like this: Would you rather have 100% of $100 or 50% of X? Well, simple mathematics will tell you that 50% of $200 is $100, so in a sense, that's your "break even." This means that in order to go from 100% of $100, you'd need a deal on the order of 50% of $300. This made your stake move up in value from $100 to $150.

There are many challenges with this though: 1. Maybe without additional funding, the company is worthless. You could be making the greatest medicine ever, but if you invest $80M now, and then you have to raise another $10M, but no one puts up that last $10M down the road, you could have essentially flushed away all the previous $80M. In this case, the company was dependent upon future financing. There is significant financing risks when capital needs are significant.

1. Many people have biases that keep them from knowing what their businesses are truly worth, and this complicates things. Let's say that the true value of a stock is only $50, but the managers think it is worth $100. Now, if a VC comes along and wants to invest money but uses the valuation of $50, the managers may scoff at the offer and say no. This is very common - you saw it with the tech bubble, the way companies were issuing debt for mortgages, and so on.

2. Just because you can't see that you own a big percentage doesn't mean it's not valuable. For example... if you were given .01% of a firm like Microsoft, you'd be rolling in money. (Roughly $20-$30M at today's valuation) At a startup, just because someone doesn't have a nice round number like 5% doesn't mean their stock isn't valuable.

3. Business has forces like physics has gravity. The long term return on equity of the average American corporate has been roughly 12-13%. This means that, on average, for every dollar invested in a business of real capital, a purchase at book value of the firm, will result in a 12-13% return. Normally, investing at book value with those returns is very tough though. And firms with those returns or above find it hard to maintain those. The point is that valuing a startup requires extreme discipline and a study of "mean reversion" that I'm not convinced most think about. Profits will at some point become constrained by forces that aren't always accounted for in the beginning. Examples? Well, let's say I open a dry cleaner, and I'm earning 15% returns on my capital. Another investor will see this and decide to cut prices a little bit and settle for a 12% return. I'll have to react (lower prices, or suffer volume decreases, etc.) and I'll wind up with a return that comes closer to 12% if this was all done at book value. It's easy to see here, because there aren't many barriers to entry with something like a dry cleaner. (Find a retail location, get equipment, get employees, marketing, etc.)

What about a company like Coca Cola? This is a lot harder to replicate, because there are significant components of scale. I think the two I focus on the most are distribution and marketing, with distribution being the biggest. Coke always has these trucks moving their beverages around - these trucks, the drivers, the fuel, etc. are not cheap. So if you want to launch a big beverage brand, you need real distribution, and enough marketing to make all that distribution worthwhile. Otherwise, people would be Fedex'ing sodas.

What's the point? There are reasons why Coke is worth a significant multiple over book value whereas a dry cleaner is not. With tech companies, I don't think these factors are always as well understood as they ought to be. Barriers to entry are a huge point of concern, especially when doing a valuation, because assumptions that are wrong could hugely impact decision making.... even on items like whether to accept stock options or just a cash payment.