"If one wanted to buy you three months in (August 2007), what's the lowest offer you'd take?"
First of all, what if we're not particularly interested in selling the company that fast? Should we just put some ridiculously high number that no one would actually pay?
Also, the numbers would seem to vary significantly depending on the details of the acquisition. Are we getting jobs at the purchasing company with good salaries, stock, and creative freedom? Or are we getting some lump sum? Should we put different numbers for different situations?
But assuming we knew we wanted to sell and knew some specifics of the deal, it's still hard for me to come up with hard numbers. Should I base it on how much money we think the product will make? Or perhaps how much money we want to have in the bank to fund future startups? Or on the estimated value of our assets after three months?
How are you approaching this question? What factors are you considering? Any help is appreciated.
NB: As usual, this is me, guessing. Only pg knows for sure. :)
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!
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.
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.
Sorry, no.
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.
7) FU money.
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.
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.
If you put some high number no one would offer, you're not really answering the question, are you? If you say you'd need 20 million, I'm going to ask: so if someone offered 19, you'd say no?
Here's what we want: We want to work on cool problems. We want to make software that solves problems. We want to make enough money to live comfortably. We want to love our work.
Hopefully, in three months, we'll have some of what we want, and be on track to get the others. Someone buying the company from us may change those things in lots of different ways, depending on the situation.
Our question is, how do we quantify those wants? It's not clear to me how to do so. One approach may be to quantify other factors that would lead to us getting what we want - such as the amount of money we'd want to start another startup.
I could just give something in the ballpark, but it wouldn't be particularly accurate. For instance, I could say that giving away the site we love to work on is worth x, but if someone asks me why not x-1 or x+1, I won't have a good answer.
Just imagine some rich guy with a checkbook. Imagine what the minimum number he has to write in order to take your three month old baby. It's a realistic situation and the guy with the checkbook isn't going to pay you what you "want" he's going to pay you what you won't say "no" to.
Assume it's a cash only deal, but figure that if it's Google you'd go even lower on cash if it meant you have a sweet job and salary -- that's obvious.
And of course if an investor would be willing to invest 19 million than he would probably be willing to invest 20 million as well... after having established the rough amount of money one would take the outcome seems to depend on negotiation skills. And to betray the actual lowest amount one would take might weaken one's own position ;-)
The more we thought about it, the more we realized that we had no idea what the company would really be worth after three months. It was just too hard for us to figure out a number that we could defend. Other people are probably better at this than us.
So instead we thought about why we wanted to create the startup in the first place. In a nutshell, we want to work really hard on cool problems that we love and get rewarded for it. Someone buying our company basically takes this away from us (since we would already be working on something cool that we love, and we wouldn't get to work on it anymore).
So we asked ourselves: how much money would we want to ensure that we could work hard on cool problems we love again? In other words, how much money would we need to go back to square one and start another startup?
For us, we basically decided we wanted enough money to work on any problem we want for a few years, plus enough money to fund our next startup when we come up with an idea we're excited about. That's the best way we found to attach a dollar figure to what we want. You may have other factors to consider, but for us, it worked pretty well.
In any case, thanks a ton for all the good responses and feedback. It definitely helped us.
This was my answer: $2,000,000 for property, $1,000,000 for the house (I live in Silicon Valley), $2,000,000 for traditional reinvestment, $1,000,000 to start the next company, $6,000,000 total for each partner,
After three months, it depends on where the software is. However, the purchasing company will be the one evaluating that aspect. For me, it is a question of what I want versus what they are willing to give in return.
So, it's good that you know what you want, but if someone offered to take you halfway there, would you turn it down? What about one tenth of the way?
Remember, most businessess fail. Yes, that includes yours, and some of mine. :)
A) How much value will you have created be the end of three months?
B) How much value will you still be able to create?
If you only have enough talent and ideas to last you for three months, you don't get funded. And if you think you'll have nothing done by the end of three months (but will still have talent and ideas), you also don't get funded.
And if you're able to create something of great value after three months but you'll still have lots of value left to add, then just unask the question because the answer is irrelevant.
You are asked to present a rational analysis of a situation that, if you think rationally about it, cannot occur!
Invested month-to-month at a fixed interest rate of 8% gives you more than R26,000 ($3,500). After taxes it's roughly R19,000.
I don't know about the USA but in South Africa this is a fairly decent amount of money to receive each month.
I would use the money to purchase a home and a car (required in RSA) and focus on my next startup.
Aaagh. No stress. Just fun.
btw - Did you know the SEC is going to pass a rule that no longer considers people with $1M in assets "rich", they are changing the bar to $2.5M...this was in last week's wall st. journal.
This is a tough one to answer since I am committed to my idea, and while money is important I want to see it through. To an investor though, their goals are to get out as soon as they can with as much as they can. Obviously you can't have a $100M company in 3 months, but you could have something that gains A-round valuations from a VC.
Three months is long enough to know if I really believe in something or not. I wouldn't sell out on anything I believe in for less than this. If that money isn't on the table after three months, I can wait and put in the sweat and time to make it worth that much.
I think it would be very easy to over/under estimate a projects worth, personally I would think that a percentage of profits over a certain period of time plus a smaller lump sum would be ideal for me.
I am a little new to this game but I would assume it would also increase my motivation to see a project come to fruition if I had a more longterm stake in it.
Paul, you mentioned that one of the key characteristics of a good team is persistence and the unwillingness to give up. When you have no fall-back and absolutely must succeed, it can be the difference between success and failure. YC can infer a lot from the rest of the application, but it might be beneficial for both parties if we were explicit about it.