On: Ask HN: When compensation includes equity, can I a...

[QandAandQ]

Well I ten to look at it like this. To get true value for your 50k worth of work. True equity pay out is :

(1/Probability of Startup Success) * (50k/10M)

So if they have a 25% chance at success, then you should be getting 4*.5 = 2%. Otherwise, you are not taking the expected value, you are taking probability of success = 1. To make matters worse, assume you wont see the pay out for atleast 5 years. One in the hand is better than two in the bush, so there is a discount there as well.

Am I missing anything here?

[fredkbloggs → QandAandQ]

There's more to it because "valuation" does not mean that the investors actually thought the company was worth that much post-investment. They almost certainly got other terms as well and those clauses probably constituted the bulk of the value they received, not the equity itself. Without understanding exactly how the deal was structured and what the terms were, you have no way of even guessing what the investors thought the equity was worth.

There's also the fact that the round didn't close 10 seconds ago; things have undoubtedly changed since it did. Those changes could positively and/or negatively affect the value of the equity.

Once you're past that, your approach is basically ok. It's a bit like the Drake Equation, though, in that it's several unknowns multiplied together to achieve a very precise result that has such large accumulated error bars as to be meaningless. The best you can do with this approach is try to avoid taking a worse deal than the last investors, which doesn't mean much.

Also, no one has a 25% chance of success unless they've filed an S-1. But that's just a detail.

[joshu → QandAandQ]

Probability of success is already factored into the price the investors paid.

You can come up with a different factor but all you are doing is effectively negotiating a different price. Your example thinks it is a $2.5MM company instead.