Valuation

This is very interesting - Fred splits startups into three categories, let's call them successes, survivals and failures. Startup employees have no hope of getting anything out of any VC-funded startup that isn't in the success category, because the structure of the VC deal guarantees that the VC fund recoups it's investment before anybody else.

Nice follow-up to Fred Wilsons post at the head of this trail - The key point is that "valuation" has no concrete meaning - the post-money valuation is the sum of the pre-money valuation plus the investment. The investment has a straight dollar value, but the pre-money valuation doesn't, and hence the post-money valuation also doesn't. Instead of haggling over valuation, the haggling should be over what percentage of the total number of post-money shares the investment buys.

The key point here is that VC deals include a liquidation preference clause, that essentially means that the founders must be ready to either succeed (10x) or fail (the VC takes all). The liquidation preferences guarantee that as far as the founders are concerned there is no middle road. Employees get nothing except in the 10x case, since they hold only class B stock with no liquidation preference. This is a bit less brutal than it sounds, because it allows the employee stock option pool to carry a lower price.

"Sure, a VC who puts capital at risk in a startup should be entitled to get his or her money out before management and common shareholders who are paid to run the business." Hey, sure, that's how it works - but this does not put a high value on anybody's time... The post argues towards the end that management (e.g. founders?) should receive a better deal, but doesn't say a word about the employees. So what is the deal for the employees? It is very simple - either the venture succeeds (10x) and everybody cashes in, or the employee gets to keep their salary.

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