Where's the love? Very critical slashdot comments on PG and YC newsweek article: "... what an arrogant twat."

http://news.ycombinator.com/comments?id=21967

I've had the same reaction as boris when reading the original quote. But what he was talking about was the case where someone turns them down because of the valuation. And I can see Paul's point there, actually.

Your analogy doesn't work; YC is buying equity just like anyone else. They're getting it cheap because they're paying for a couple undergrads to work for the summer -- your analogy would work if the bank would only give the loan if you had an established business and promised to work full-time for years.

Since we have the math, there's no reason to make up emotionally charged analogies. YC values these companies at somewhere between $100K ($10K for 10%) and $1.5 million ($15K for 1%). They do some legal work, and offer lots of advice and connections. Obviously, this isn't a good deal for everyone (given the industry I'm in, for example, I'd probably pass on YC), but if you're having trouble understanding why anyone would accept it, you may just have trouble thinking like a smart, ambitious, well-informed twenty-something.

And judging by the quality of your writing, age is not what sets you apart.

However, society brainwashes us all in some way - don't you think?

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OK, let me try to condense 4 years of finance education into few paragraphs, so that I can point out the fundamental errors you're making:

First, you have to understand the capital asset pricing model (CAPM): E(r) = B(Rm + Rf) + Rf

E(r) = Expected return; B = beta = the risk of a firm; Rm = the market risk premium; Rf = Risk free rate

OK, so the capital asset pricing model basically states that the riskier the investment, the higher the return the market will demand. This makes sense. Investing in McDonalds is much safer than investing in Justin.TV, because you're almost guaranteed that McDonalds will be around in 5 years.

This is why VCs demand a 30-40% expected return - because there's a very high risk the companies will fail. This isn't "unfair" - this is how the stock market, and the rest of the financial world, works. When you buy a stock, its price has been shown to correlate to the expected risk. Higher risk stocks earn a higher return, as predicted by the CAPM.

Now, I think you're confusing debt with equity. Of course you could take out $15,000 of debt for 9%, but you're entering into a contract to repay it. If you don't, they get your house, car, etc. This is why the debt isn't as expensive - the bank knows they're getting their money back, one way or another. The bank is using the same CAPM calculation, except with a lower beta.

Finally, if you choose equity, you obviously will want to go with the firm that values you the highest (and gives you the best deal). The argument I was making is that YC already values these startups at a very high level. It's not very often that someone will value 3 months worth of your work for $332,000K [($15K/5%) x (1.5^0.25)].

- Reddit is a big group of paranoids ;-) rather than just one gun-toting Michigan hick, and

- the government "conspiracy" stories on Reddit are, by and large, true or close to true, whereas on ./ they're complete mis-readings of stories or out-and-out BS. It's a matter of degree, in other words.