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by brandonb·14y ago·view on hn ↗
His numbers are way off. 2M is not a "high" pre-money valuation--most startups nowadays raise a seed round at a 5-10M pre-money valuation. So for $50k, an investor will get 0.47-0.91%, whereas the employee in this example gets a strictly better deal at 1%.

That said, I agree that $50k/1% is a low offer. Lots of startups (at least in the SF bay area) are offering 50-100% higher than that, and these are good startups with experienced founding teams, funding from top investors, paying customers or traffic already, etc. So definitely explore your options! There are great deals out there.

2 comments
His numbers are way off. 2M is not a "high" pre-money valuation--most startups nowadays raise a seed round at a 5-10M pre-money valuation.

I'm not saying your statement is wrong, but am I the only one who thinks something is wrong here? Are most startups worth 5-10M right after seed? I would say no.

Conservatively, I would tend to agree with the author. 2M is high for a company that only has seed money.

As one data point, the average valuation of a YCombinator company for the last batch was $10M: http://techcrunch.com/2012/05/22/ycombinator-80-strong/

And that's the average; many were higher. There are probably amazing startups out there that raise at a $2M valuation, but it's definitely at the low end of the range in the current funding climate. If you're looking to join a startup, I wouldn't fixate too much on valuations, but I do think it helps to be aware of what the current market is like.

(Note that it varies by region. Silicon Valley and NYC are probably comparable, but other regions have less investment and so have lower valuations on average.)

Why is it "wrong" for something to be priced high?

Try this thought experiment: Mark Zuckerberg (or whoever your favorite entrepreneur is) comes to you and says he's quitting Facebook. He's going to start a new company, and he'll let you invest at a $20M valuation. Do you accept?

No...? What makes you think Facebook is a success Zuck can just repeat at will? Having been lucky once already does not make him a better entrepreneur; though the brand will surely help promoting his new startup, and a billionaire has certain connections mere mortals don't have. But neither of those fact are tied to him being a good entrepreneur... look at Bill Nguyen to see where this line of thinking leads you. Color is doing great, isn't it?
Don't focus on Zuckerberg. If you think Facebook was just luck, pick someone who you think succeeded by skill. Would you invest in their next company at a $20M valuation?
You've identified by omission precisely why it can be "wrong" for something to be priced "high". How on earth can I know if $20M is reasonable without knowing what the business is?

We're all sat here, reading about "average seed round valuations" and the like, but that concept tells you nothing about what the next startup you meet "should" be valued at. Claiming that it does means acknowledging that business fundamentals have been thrown out of the window, and what are you left with then? Gambling.

Of course early stage startups aren't judged by business fundamentals.

Your argument is fully general against valuing equity in any early stage business ever at any price. It equally says that the investors are "gambling" and the founders are "gambling", as much as anything about employees.

Yes, everyone who is being paid in equity is taking a risk. It is possible to attempt to assess that risk. The key to being an early employee is bringing an investor mindset to the table: do I think this company is going to be successful or not?

Hell no. Zuckerberg has several billion dollars in the bank. He could buy several countries. He doesn't need my money, so he's got to have an ulterior motive if he's seeking outside funding.
No, they do not. They issue convertible debt with a cap at $5M-$10M. A debt conversion cap is not a valuation - the current valuation is by definition lower. It's lower by at least the amount of the discount, and almost certainly by much more than that.

Simple thought experiment to make this obvious: when a company raises convertible debt with no cap, are they infinitely valuable?