What's the lowest offer you'd take?

https://news.ycombinator.com/item?id=5700

by bhb • 19 years ago

21 52 19 years ago

news.ycombinator.com

bhb3• 19 years ago

We're working hard on finishing up our YC application, and we're having a lot of problems with this one:

"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.

notabel• 19 years ago

I think that question, like the question about stock, is largely to make you think about the problem, and see how you react to it. Obviously, it's not possible to produce a number with any real meaning; just discuss potentialities, grand strategy, basically the conceptual framework you'd use for producing that number.

NB: As usual, this is me, guessing. Only pg knows for sure. :)

sethjohn4• 19 years ago

A good way to start might be the rule of thumb that startup investors typically want a 10x return on their money (for companies that succeed). If YC invests $20K in your company in return for 6% of the company, and the company sells for 3.3 million, they get 200K.

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!

jadams4• 19 years ago

Er. I recommend not immediately pissing away $200K, but that's just me. If you're in your early 20's, a $200K investment could easily be $1M by your thirties.

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.

pg5• 19 years ago

Honestly, this is not a hard question. We're not asking you what you think we want as a return. We're asking what you'd take.

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.

pg5• 19 years ago

"Approaching the question?" How about just answering truthfully? What would someone have to offer, assuming nothing else about the deal?

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?

bhb3• 19 years ago

I think I've stated our question poorly. It's not that we don't want to answer truthfully, it's that we're having a hard time converting what we want into a dollar figure.

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.

dageroth2• 19 years ago

Hmm, I think with that argumentation you'd get a slippery slope argument. "If you take 19 Million Dollars, would you say "no" to 18999999$ ?" Of course not, and this argument can be continued. Therefore the value one can state is surely one that gives a rough sense of the amount of money that one would take for the company, a fuzzy value. Of ocurse most people would be willing to take a lesser amount, but when they state the lesser amount, they'd probably take even then a smaller sum again.

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 ;-)

bhb3• 19 years ago

I just wanted to follow up and let everyone know how we ended up answering this question. Hopefully this helps somebody out there.

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.

zkinion• 19 years ago

Why do you have to take an offer at all? It normally takes anywhere from 1-2 years to make a site successful enough to justify selling for a gargantuan amount. In 3 months, how much growth can you get to show enough promise of future growth/monetization?

pg5• 19 years ago

Enough, obviously, because we've had several startups that got acquisition offers after three months.

ralph2• 19 years ago

Any takers? I'm not after names, but numbers.

far33d3• 19 years ago

If a VC can choose to value a company at $15m, shouldn't a tech savvy acquirer be willing to pay that much instead of waiting another 2 years when the same technology might cost $75m?

paahijen3• 19 years ago

Not quite, you should read Paul's essays (don't remember which exact one). VCs valuation depends more upon the amount of money (s)he's going to put and generally they won't invest smaller amounts for insignificant stake. Which implies you've to probably get more money than you really need and shell out a little more equity.

Alex39172• 19 years ago

To valuate your company after three months you have to take two things into account:

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.

sethjohn4• 19 years ago

Perhaps the question is meant to be read as sort of a Zen Koan.

You are asked to present a rational analysis of a situation that, if you think rationally about it, cannot occur!

Alex39172• 19 years ago

Alex3917 threw his shoe at sethjohn, and sethjohn was then enlightened.

Harj• 19 years ago

just my opinion but i'd approach this question more from the angle, what is the $X I need to have financial freedom. do the math based on the % of the company you own to work out how much you'd need to sell the company for to make that amount. $X is going to vary for everyone.

prakster• 19 years ago

For PG: Paul, if you absolutely have to have this question in the application, it might help to add the word "cash", e.g. "What's the lowest cash offer you'd take".

imperator• 19 years ago

The figure you give depends on your feelings which are created from your internal and external circumstances. I immidiately asked myself the question, "What do I want?"

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.

jadams4• 19 years ago

You've just listed everything you want out of the future (financially), which is a different question. Remember, this is for a 3 month investment of time.

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. :)

reitzensteinm• 19 years ago

Taxes.

pistoriusp• 19 years ago

The lowest, R4,000,000 (ZAR), it's about $540,000.

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.

davidw• 19 years ago

[dr evil]One miiiiiiiiiiiiiiillion dollars[/dr evil]

jward• 19 years ago

I'd want to walk away and be able to look someone in the eye and say "I'm a dot com millionaire." So with the share structure, capital gains tax (guessing), and exchange rate the number I'd pull out of my ass would be four million for the whole shot assuming no dilution.

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.

blackthorne• 19 years ago

I will pull a Zuckerberg and turn down 2 billion

danielha• 19 years ago

As a follow-up question, I think a nice addition for the application would be: "Aside from what you are currently making, what is driving you to be an entrepreneur?"

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.

paahijen3• 19 years ago

Don't quote a number, quote a multiple instead. :-) eg. If XX invests 20k for 10% in your company. their 20k becoming 200k is a good deal which implies something like 2M for your company (not bad for three months work!)

paahijen3• 19 years ago

A follow up thought. This also puts XX (may be YC in this case) in valueing your company just right! (Ok YC are nice people so thats not a problem, but if you were asked this question in other context, you better be prepeared!) 'cos they cannot value your company too low. 'cos even if someone is willing to give 10x of their investment, you may say "No Deal" and if they value your company too high (like some VCs do), it almost rules out probability of a nifty 2M$ acquisition. (This is again from Paul's essays)). It's almost like RTFM :-)

richcollins• 19 years ago

wow I am surprised this has gotten so many comments. Obviously it depends on the value of the company. If threw together a prototype that hadn't seen a single user and there was no apparent IP, then 100k would be a ton of money. If I were sitting on the next YouTube with millions of users added each month, then 1B+.

ced• 19 years ago

70K net, if the alternative is a 20% chance of getting rich after a couple of years. 70K is below YC's average initial valuation, as I understand it. I wonder how much it would bother them... 70K is enough to live like a student for 10 years in a low-cost region, to learn and work on just about anything.

chandrab• 19 years ago

Guys, when formulating your magic number in your head, not forget to include taxes...that's up to 50% gone right there. So your $1M is now $500K. I speak from experience on this. It's a good story over a beer.

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.

dageroth2• 19 years ago

I'd say that not the amount of time spent on the development of the software is the crucial question but the expected earnings. If the idea is really novel or promising and the expected revenue huge than an investor is paying for the idea and probably the team and not for the work done in these three months. If the team consists of gifted inviduals and a great idea than it seems to me not to utopian to accept only a very high sum because it is rather rare to have a very promising idea and gifted people together.

Constantine• 19 years ago

I would have to agree, the problem is when you have to self measure a potential projects earnings before it comes into a large circulation.

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.

MEHOM• 19 years ago

Making a point that one is thinking about what is their low offer means he/she is only for short term gains and realizes their idea is not worth that much.

What's the lowest offer you'd take?

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