Would you accept a buyout offer that made you rich but you still felt was undervalued?
I.e., would you turn down an otherwise lucrative offer for pride?
Just like buying a house, you shouldn't get too attached to an offer or buyer until the ink is dry on the signatures. Keep your options open and be ready to walk away even at the last minute; if you don't maintain that perspective you lose control of the process and become vulnerable to last-minute deal changes. Don't let buyers put things in terms of how much money you'll make, keep it focused on what the company is worth and whether it's the right strategic move for the company.
If it's enough to set you for life, then I'd be inclined to take it and move onto the next challenge in life.
I'm a swing for the fences type of guy, but I'd have a hard time passing up any offer that hit my minimum number. That's why I think investors should let founders of companies take money off the table at a certain point. It gives them more desire to go for the big score, knowing that even if they fail, they're still set.
My brother is a pretty good player, but he is quick to 'chop'. In fact I mock him all the time for it, but it really depends on what your comfort level is. At a certain point it is not desirable to take exchange risk for reward. Inevitably whenever you wish to get out of the game, you are going to have to take a discounted rate. In poker, if the final 2 guys chop due to the highly top-heavy prize structure, you are obviously going to take some sort of discount.
In fact, poker tournaments in general have the concept of chip devaluation, which is fairly similar to how money works in real life.
Also, diversification is a decent passive strategy, but not one that you'd take if you were intent on making substantial gains.
As Warren Buffet says, "no one ever got rich on their seventh best bet."
The question is, could you stop working and retain your sanity? I wonder about people who achieve success too early in life--they have many years ahead of them and much to learn, and wealth in some ways may be a hindrance.
I made my first million when I was 22, and though it didn't keep me from working ever again, it basically paid for all of the things I needed. Anything beyond that has been incremental gains. It's a lifestyle changing amount of money.
do 8-10% and you're talking serious money for no work.
I know people that tell me they can not live on less than 100,000 a year. If i could I would send them to ethiopoia, one way.
But anyway you should always produce (See pg essays). So the thing about money is not to solve the problem now, but to be able to have enough resources so you can have more freedom on deciding what to work on. If I am lucky, I should be able to work until I die.
What they miss is that dollars offer diminishing returns at scale, so the decision is rational. Going from 0 to 100,000 dollars is very different life-style wise than 3 million to 3,100,000. Because those first dollars are "worth" so much more, and because the upside of the best outcome is not worth as much proportionally, the decision is rational (although people are often being irrational in other ways in this game).
In your case, I suggest you consider your BATNA (Best Alternative to a Negotiated Agreement) and estimate their interest, then consider countering. You can only negotiate your "best deal" when you're willing to walk away. If you're not willing to walk, you play it safe and "make a deal."
Edit: Keep in mind, if you counter, the worst they can say is no, and you can often still acquiesce to their original offer.
http://en.wikipedia.org/wiki/Best_alternative_to_a_negotiate...
"Maximize your utility function, not the money, moron!"
(I'm not an economist, but I talk like one.)
http://en.wikipedia.org/wiki/Loss_aversion#Can_loss_aversion...
In fact the article you linked to says exactly that:
"All of the above effects can be expressed in terms of the utility function of money, and, in particular, not regarding money as a linear measure of utility. In other words, if money has diminishing marginal utility, then each dollar is worth less than the one before it. To use the example before, the first $1000 might be worth $1000 to a person, and the second $1000 worth only $950 (in terms of utility). This would not be "loss aversion" but just a phenomenon adequately explained by economic theory."
Anyhow, I agree marginal utility is well understood by economists, just disagree that that is the standard way dollars themselves are viewed in classic economic theory. And perhaps I over-reached when I built my straw economist.
This is actually the one sticking point with my partner. He has "mega bucks" on his mind, but if an offer comes through in 6 months for mid 6 figures+, I would be inclined to take it unless we have some serious traction. Not enough to make you rich, but enough to bootstrap you better for the next challenge :)
If the company has more potential than the offer, most likely no.
The real question is... will this buyout impact your life they way you want it to? ...or will you be miserable or somehow transformed into someone you don't want to be as a result?
if you are profitable and you want out, you have to ask; "will this enable me to do my next activity?" if not, then don't sell yet you are much better off growing your business.
if you are not profitable and you want out, well i would ask; "Will this cover my effort on this project?"
I have a personal number in my head that covers my anticipated yearly expenses, plus has room in there to keep adding to savings. above that amount in wealth i very well may sell my first business, if i will find my next idea more desirable to pursue.
The thing that really happens in life is that in addition to NPV, there's this little thing called pride, and when you think something is worth more that what someone else thinks its worth, it's sometimes hard to step back and say maybe they're right and I'm wrong.
Here's the thing to ask yourself: Do you think there's someone out there that will reasonably pay you more than the $x+$1 you have an offer for. If so, hold out. If not, sell.
All transactions are made on the principle that what you are giving is worth (to you) less than what you are receiving in return. All of them. No exceptions.
If you think that the you are rejecting an offer just because of pride, than it your adding the value of it to the transaction price.
If you do however think that what you have really is worth more than the value offered, you'd refuse.
Unless, of course, you're already working on your life's mission :)
If it's something you're running out of your mom's basement, well...
On the other hand, if you have the chance to become comfortably rich and essentially free then why not?
Of course there is a third (fourth, fifth and so on) variation. Perhaps it has nothing to do with pride or money, perhaps you enjoy the work that you do so much that being rich is not something you can enjoy with the same amount of passion.
I'd probably take the money though.
I'm thinking of someone with a much smaller share. As someone has pointed out, the 100% increase from 50k to 100k is different than the 100% increase from $1M to $2M.