A good way to start might be the rule of thumb that startup investors typically want a 10x return on their money (for companies that succeed). If YC invests $20K in your company in return for 6% of the company, and the company sells for 3.3 million, they get 200K.
Our three founders came up with a number in our own heads, then we agreed on something in the middle...which turned out to be pretty close to 3 million.
As to the question of whether to sell so soon, my personal feeling is that selling soon in a case like this would be a fantastic deal. Each founder would walk away with $1M, and the experience of being a successful entrepeneur. Next, take 100K and throw a tremendous party, take another 100K on go on a ridiculous vacation...then get back to work with the $800K you have left over and start up your next company!
Honestly, this is not a hard question. We're not asking you what you think we want as a return. We're asking what you'd take.
So if you think 3 million is a fantastic deal, then you haven't answered the question correctly. We're not asking what you think would be a fantastic deal, but what would be the worst deal you'd still accept. Would you really turn down 2 million for three months' work?
Incidentally, we don't even think about what we want as a return. Some VCs may, but we don't. We just fund anyone who seems good, and assume the returns will take care of themselves.
Again, it depends on how exactly you imagine the situation. If the choice was acquisition by Google for $2 million, or probable destruction by Google in a year...certainly I would take the former.
On the other hand, if I was passionate about the product and thought there was great potential for growth over the next few months and years, I wouldn't want to walk away for anything less than a fantastic deal.
I appreciate your focus on excellent people rather than returns and dealmaking. The profitability of YC strikes me as an interesting question simply because it's an important aspect of a model that is unique and interesting in many ways.
What a relief! Thank you for sharing that. After watching everyone talk in millions here, I was concerned my "absolute worst" deal that stretched below $100k might hurt our chances of being accepted to YC. I am going to go ahead and put in an honest estimate :) thanks,
Er. I recommend not immediately pissing away $200K, but that's just me. If you're in your early 20's, a $200K investment could easily be $1M by your thirties.
Taking a $1M lump-sum means never having to work again. That's not to say you won't work again, or won't be productive again. But I'd feel really stupid if at some later date I had to take a job, just because I pissed away my capital.
That comment was intended to be read somewhat tongue in cheek, but for the sake of argument:
1) What's the point of having money if you aren't going to spend it and have fun? I suppose you could throw a smaller party and write a big check to the Google Philanthropy...but either way money is meant to be used.
2) If you actually had the skills and personality to turn $20K from YC into $3M in three months...you've clearly got entrepeneurism in the blood and shouldn't ever have trouble finding a lucrative job that you enjoy.
Regarding (2), though. I think making $3M in 3 months has a lot more to do with luck and hype than any inherent skill. So, obviously those numbers were pulled out of thin air. The likelihood of that happening is extremely low.
Also, having a job you enjoy is no panacea. Whenever you're working for someone else (even the customer), there are things you won't enjoy. The discipline that allows you to do these things is the same discipline that makes it possible to work at a job you don't really enjoy.
Having said that, I agree with the approach of sacrificing quality-of-life for, say 5 years in order to never have to work again. Doing this for something you mostly enjoy will allow you to put in the effort without killing yourself. Unfortunately, this can become self-perpetuating. There's no inherent good in working.
Well, obviously, this is for some reasonable definition of have.
The numbers work for me. I'm married, and have a mortgage.
I guess I was blurring the line between being retired and semi-retired. Were I to earn such a lump sum, my daily activities would probably look the same. I just wouldn't be working for anyone else, and wouldn't have that mental burn-rate / countdown timer going.
Controlling expenses is a very powerful tool. For every after-tax dollar you save, you're saving like 2 pre-tax dollars. So, it's much more effective to save $1 than to earn an extra $1.
Here's my mental hierarchy of wealth. Each one represents a drastic change in quality of life, and options. It's somewhat logarithmic.
1) Stop living month-to-month. I.e. at the end of the month, you have enough to pay another month's expenses in the bank.
2) Pay of all debt, except mortgage.
3) Stop living year-to-year. I.e. at the end of the year, you have enough money to not work next year, possibly having to reduce your quality of life, but not to poverty.
4) Semi-retirement. If you didn't work for the next five years, you'd still have enough money to start a business at the end of the period.
5) Retirement. You can maintain your current lifestyle, or a slightly scaled-back one indefinitely. Mortgage is paid off.
6) Rich. Your kids could do (5), if you decided to fund the lazy brats.
Good points, but I'd urge paying off the mortgage before (4). Paying it off twenty years early saves a wad in the long run. And not having mortgage payments as a recurring monthly drain makes (4) easier.
Actually, you are wrong. Why pay off debt that is only costing you 6-odd percent a year (or less if you managed to refinance a few years ago) when you could invest that money and average 8-10 percent a year (or better). If you have enough money to pay off your mortgage, shove it all into the stock market. You'll come out ahead over the 30 years you're paying your mortgage.
Definitely yeah. That'll provide 50k/yr of risk-free interest to live off of while you work on something you really want to buy the house, etc. You won't have to work a side job to support yourself and can focus full time.
Our three founders came up with a number in our own heads, then we agreed on something in the middle...which turned out to be pretty close to 3 million.
As to the question of whether to sell so soon, my personal feeling is that selling soon in a case like this would be a fantastic deal. Each founder would walk away with $1M, and the experience of being a successful entrepeneur. Next, take 100K and throw a tremendous party, take another 100K on go on a ridiculous vacation...then get back to work with the $800K you have left over and start up your next company!