It'd be unethical if you knew $500 was undervalued and you thought Ferrari didn't, i.e. if they were inexperienced and possibly accidentally undervaluing their own car. Then you would be taking advantage of them.
I disagree. The CEO of a startup is an adult, maybe a young one, but an adult no less. They need to know what is over and undervalued for their company. On the other hand, the investor has a fiduciary responsibility to get the best round possible for their fund. In Google's case it is for their shareholders.
In other words it would be unethical for the VC to not work to get the best valuation.
Interesting code of ethics you're proposing there: that it's actually unethical not to take advantage of people, and your only ethical responsibility is to the people who pay you. Convenient, I'm sure.
If you invested what you consider to be a large amount of money with a VC to produce a return for you over a 10 year period would your rather they:
A) Care deeply about producing the highest return for you and in doing so use their expertise as negotiators including their competative advantage as a well branded firm (google). And in doing so dilute founders and less experienced investors in the process...
B) Ask them to negotiate in a way which maximizes other investors' returns and founder returns at the expense of your own returns.
Both cases you are paying them a fee to do this.
If you answer B, I encourage you to leave a response explaining your position.
Then consider you are a pension advisor who needs high returns to make sure that you will be able to pay the pensions of fire fighters. Would you make the same decision?
Your argument applies as well to Google Ventures as to Enron. I'm sure there's a line in your head that companies are not meant to cross in serving their investors, but it didn't make it into the argument.
Fiduciary responsibility is independent of ethics. You can't use ends to justify means.
Your argument applies as well to Google Ventures as to Enron.
Exactly! Enron would be the equivalent if Google Ventures decided to falsify their valuation documents they were sending to investors saying they were getting much better valuations than they actually were. Then one day in 6 years they said all of those financial reports they submitted to the SEC were falsified so there is a total loss in the Google Venture line. In doing so they violated their fiduciary responsibility.
I'm sure there's a line in your head that companies are not meant to cross in serving their investors, but it didn't make it into the argument.
Of course there is, but an arm's length negotiation with CEOs of angel invested startups seeking to be the CEOs of the worlds largest, most innovative companies is well within that line.
Fiduciary responsibility is independent of ethics.
Fiduciary responsibility is the core of business ethics that should never be violated. Within fiduciary responsibility you still can't do anything illegal. Of course ethics are always a grey area which is why there is a discussion about this topic here, but I disagree where the line is clearly with you.
You can't use ends to justify means.
That is not what I am doing.
Seriously, ask yourself what you would want the VC you entrust with your money to do.
"Seriously, ask yourself what you would want the VC you entrust with your money to do."
Is that all you need to ask in considering how ethical an action is?
The whole point of ethics is to reason in the context of tensions. Tensions between what you want and what others want. Companies have responsibilities to more than their investors. Their employees, their communities, their customers, their environment. Focusing exclusively on one side of the tension has nothing to do with ethics.
Focusing disproportionately on investors is also ethically convenient, because their interests are often aligned with yours.
"an arm's length negotiation with CEOs of angel invested startups seeking to be the CEOs of the worlds largest, most innovative companies is well within that line."
It may seem obvious to you, but it's clearly not obvious to grandparent since that is what the argument is about.
"Fiduciary responsibility is the core of business ethics that should never be violated. Within fiduciary responsibility you still can't do anything illegal."
I think this position doesn't require the word 'ethics'. You can get by with just 'laws'.
This isn't a rhetorical device. I think lots of people think this, and honestly am ok with it. At the least it's internally consistent. It just fails for me because it doesn't permit asking, "what should the laws be?"
We are discussing CEOs of startups and their negotiation with professional investors. In that scenerio, I cannot imagine a reason why a VC should give up something in the negotiation because he feels like the startup doesn't know what they are worth. Both sides have lawyers and advisors and the CEO is an adult who can analyze his future as well as anyone else.
If the CEO is unable to negotiate what they are worth, they should hire a dreaded MBA to help them.
1) You're going to be in business with your investors for the next decade (if things go well).
2) The pool of investable startups and investors is pretty small, and reputation matters. If you screw a company once, you might juice your expected return from 50% to 55% (likely still an actual return of $0 on any given deal), but if you get a reputation for behaving badly, your dealflow will no longer include good deals, which hurts you far more.
The article suggests that Google is offering half of what the entrepreneurs have already been offered. So the hypothetical Ferrari guy is choosing to sell to me for $500 over another offer for $1,000, even if the true value is $50,000.
The founders in YC are hardly naive innocents who are undervaluing their startups. A) the empirical evidence shows that they get the highest valuations for their seed rounds; and b) the current conversation explicitly addresses the case where they already have an offer with a cap 2x that what Google Ventures is offering.
