Then you're still wrong. I quote from the article: "For example, suppose Y Combinator offers to fund you in return for 6% of your company. In this case, n is .06 and 1/(1 - n) is 1.064. So you should take the deal if you believe we can improve your average outcome by more than 6.4%."
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.
Suppose your present hope of future utility from your startup varies
linearly with the number of shares. (This is not a radical assumption;
essentially all startup shareholders feel this, at least for numbers
near that of shares they own.) Suppose you trade 6% of your stock in a deal that will increase your average future utility by 6.4%. You've made a straight trade of hope of future utility for future utility. We don't even have to introduce money.
IF the expected utility varies linearly with the number of shares (and thus the expected amount of money received in the end), you're absolutely right. But does it?
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.
Yes, for most founders hope of future happiness varies linearly with the number of shares-- at least, in the region of the number of shares they have. If someone gave them 10% more stock, they'd feel 10% richer-on-paper. (There are anomalies at the extremes. E.g. if you got 100% of the stock, your cofounders wouldn't be motivated, and that would decrease the value of your shares.)
No, I don't think they contradict one another. The reason is that the most likely outcome is just to the right of the step.
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.
Since you're talking about step functions and expectation, the final equation should be framed with a binary parameter in mind: x=0 (no liquidity event occurs), x=1 (liquidity occurs).
"The reason is that the most likely outcome is just to the right of the step."
"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?
If a man is wrong, you don't need to tell him so. Just give it a rest and let others form their own opinions.
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 you are well intentioned, but if I'm full of it I'd rather someone told me, preferrably in a respectful but blunt way. I'll form my own opinion anyway.
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.]
No, really.. It is wise to never publically tell someone they are wrong, unless you're defending someone. You should wait until his friends and colleagues have left his side, then whisper your opinion into his ear. In the Internet world, that means sending him an email. To not do so is bad karma in every sense of the word.. My post above was modded down because I publically pointed out that he was wrong to point out Paul's percieved flaws in public; maybe I should have sent him an email instead. This wisdom is proven true over and over. My #lisp fiasco convinced me of that (long story).
You're wrong to tell people they're wrong to publicly tell people they're wrong.
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
I don't see in there where you should prefix everything with "What an oversimplification! You're wrong, wrong, wrong!"
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.
I would want this guy making a few million, if he doesn't steal them. His waitressers and waiters can quit anytime if their alternatives are overall better.
(Kudos for being able to imagine a Paris Hilton with brains.)
That's exactly the problem, a reward in the face of repugnant behavior. I wasn't going to respond, but I found this comment pretty depressing so I have to ask you: You seriously believe being rich is a license to be a douche? Or that everyone's allowed to act however they want to food service workers, or the people that guard you while you sleep? Or anyone at all? What if, for example, someone had to be a waitress to save up money for college? Sure, she could start a business, but what if she has literally zero money and no contacts, and she was just born like that?
What's depressing is how often people don't think of other people.
Being rich in this case wouldn't be a reward for his attitude, but for solving the problem of people who want secure, usable backup systems.
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.
