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Comment by just2n | Hacker News Reader

At 3% gain per year from relatively safe investing, $125k would end up being $168k after 10 years. She'd have to earn an average after-tax salary of $168k for the next 10 years for the investment to be equivalent.

That's fairly high, especially for someone just getting their career started.

And if she's very successful as an entrepreneur, running a business doesn't mean you have to pay yourself some inane personal salary, especially not if you'd owe 10% of it to an investor, so if her company becomes wildly successful but she only collects some salary of 100-120k and equity which is perfectly livable at only 90% after taxes, she could still walk away with an enormous amount afterwards, yet the investor would have a significant loss.

I don't see how any investor would prefer this over equity, it seems like a guaranteed loss?

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Yeah, this is a crazy investment given the likely return. Presumably an anomalous result due to the novelty of the stunt. In a world in which such a thing were common and had no novelty value, we would expect the amount of money raised by such a deal to be probably under $50,000.

On the other hand, if her startup gets bought out and she ends up with millions of dollars as a result, the investor's gonna get 10% of that.

If her startup gets bought out, she ends up with millions of dollars of capital gains, which isn't salary.

> It doesn’t matter where the income I receive comes from, whatever the after tax sum is for each year, the investor will see 10 percent of it.

They would still get a piece of that pie.

Edit: added quote from the article

Maybe they like gambling?

It's only a gamble to a certain extent, for instance, even if her company fails, it's likely to happen in the next 2 or three years, that leaves another 7 or 8 years where she will require employment in order survive.

Judging by her character and drive to succeed (she emailed 1000+ angel investors, is starting her own business, etc) I could see her occupying a fairly high wage job, in the $50,000 - $80,000 range, if we take a mid point, that's about $65,000 per year for 7 - 8 years.

$65,000 * 7.5 = $497,500 / 10 = ~$50,000.

Assuming that's true, they only stand to lose half - if her idea succeeds however, they could make millions.

I would assume the investor isn't hard up of cash, so losing $75,000 would be a drop of water in the ocean, but making a few million would probably be a nice bonus.

It's extremely unlikely that they'll make millions. For them to make even a single million, she'd have to earn $10,000,000 before age 29. Even if her business idea is relatively successful, a payout-to-founder of $10,000,000 after taxes is very unlikely.

This concept is basically angel investing with some risk mitigation (if the business idea doesn't turn out, but the founder goes on to create another business or get a high-paid job as a non-founder, you get some money out of it), but with a much lower reward.

The lower reward is as follows: A typical angel investor might get, I dunno, 5% equity in a company. In the case of this deal, the "angel" gets 10% of the post-tax amount of the equity that the founder keeps and turns into money.

Which is AWFULLY rough! I mean, suppose that the founder maintains 30% of their company, and then converts all of that to cash, and gets hit with only 15% long-term cap gains, all in ten years. So the angel's effective equity share of the company is .3 * .85 * .1 = 2.55%.

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