Just curious on the part where he says that the stock is most likely worthless. Are there any hard numbers on the average outcome of YC startups, and startups in general?
I mean, all else being equal, what is the expected value of 0.5% of the equity of the average startup at stage X these days?
Here are a couple ways that common stock can become worthless:
- The most obvious and common, the company fails / does not exit
- The company raises money and the investors have liquidation preferences. This means that the investor is guaranteed to make 3 times what they put in when the company is acquired. So, for example, if you raise 10 million dollars and your investors have 3x liquidation preferences, you have to sell the company for over 30 million before common shareholders see any money at all. So in this situation (and it is common), the common stock is essentially worthless.
Even with a 1X multiplier, that preferred stock still has a good chance to give the 1% employee getting the shaft.
Let's say that there are 5 board members, and 3 of them are VC reps. Those VC companies have 50% of the company, with dibs on the first $50 million. Now, it's time to sell the company.
Pretend the company could be worth between $0 million and $100 million. Figure out what the VCs are likely to sell the company for, remembering that they get 100% of the first $50 million and 0% of the next $50 million.
Respectfully, I cannot recall seeing a single YC company which has given up 3X LP at any stage short of an out and out crisis - and I've seen a few (work on the investor side). Hell, short of short-term debt which is clearly a bridge to an acquisition of sorts, you never see those terms. The high level point is valid (LP is there for a reason), but not to the scale you talk about it.
AFAIK comprehensive numbers for YC outcomes are not public, but Paul Graham has indicated that returns from YC investments follow a power law distribution, meaning that if you can only get equity in a single YC company (by virtue of being an employee) you have a very small chance of making a ton of money but probably will end up with very little.
It could well be life-changing, depending on your circumstances and condition.
There are parts of the US where it's a big house and almost enough to retire on, if you're lazy and willing to live cheap. It's definitely a few years of runway, if you've got an idea you want to explore. It's definitely a no-loan college education.
The expected value of 0.5% of the equity in that startup should be 0.5% of the valuation. That said, not everyone has the savings or investments to offset that level of risk. For someone with a "low" risk-tolerance, that value drops dramatically.
Remember risk in our (assumed rational) finance market is as much tied to your ability to have enough liquidity as it is to have a positive outcome.
I mean, all else being equal, what is the expected value of 0.5% of the equity of the average startup at stage X these days?