chakkop

Hi Uiri - excellent summary. To add:

Ratchet - when companies raise a down round, investors who invested at a higher valuation get issued additional shares. This effectively adjusts the price/valuation they paid. The number of shares issued depends on the type of 'ratchet' investors have. There are two main types of ratchets: 'weighted-average' and 'full-ratchet'; the latter is not company/employee friendly and is no longer common. For employees, what this means is that if there is a down round their equity will get more heavily diluted than they expect, because additional shares are issued to compensate investors who invested at a higher valuation.

IPO protections - you are correct. In late stage/pre-IPO financings, these protect investors from an IPO occurring at a lower valuation than they came in at, either through outright 'blocking rights' (preventing such an IPO from happening) or, as above, through ratchets that adjust their share price/valuation. Such IPO protection terms have increased in 2015/2016.

I agree with you: it is a long book, with more problems than can be enumerated and discussed here, but key amongst them is the idea that inequality--the Gini coefficient--matters above all else, and particularly matters more than the absolute improvements in living standards that we (most of us) have experienced in recent centuries. I don't think one's goal should be to enter the ranks of the 'fabulously wealthy'. Anyway, by definition, there will always be a bottom 10% or 20%.

Maybe more correctly: the vast majority of humanity was equal in its wretchedness, poverty, ill-health, and violence; the vast majority of people led miserable, hungry, precarious, uninteresting lives.

Again, I'm not saying we've done all we can do. I'm not saying that many of the rich don't behave reprehensibly. I'm not saying we can't do better. But the question is: How? How can we do better most effectively? I don't think the answer is 'tax global wealth and redistribute' a la Piketty--because that's not what enriched us so over the past 200 years.

So yes, it has gone up and to the right, especially in most recent history--though, because of human folly, there is no guarantee that it will continue to do so.

Nearly every assumption in this argument of Piketty's is flawed. Is it only the rich that have capital? What about human capital? What about creative destruction--the entry of new market players? Don't the rich (and their children) often squander their capital? More to the point: look at the evidence of the many rich people around us. Did they build this wealth by banking on r > g, or by putting idea upon idea and creating something new?

I think the historical record is against this. Specifically: before the liberal revolution--the liberal idea that all humans are equal, which was truly revolutionary--it would have been unimaginable for a member of the peasantry to even claim equality with some lord, let alone build a legal case and have it heard. Again, it's far from perfect today, but better on many fronts. I imagine that differences will continue (they're unavoidable) but the mechanisms to cope with injustice will get better.

Agreed with you and k-mcgrady. I think maybe we will need to use more and more 'hacks' that make us aware that it's already reasonably good.

FWIW, Benjamin Friedman ('The Moral Consequences of Economic Growth') has great research that shows that when people stop feeling like they're advancing and participating in economic growth, moral and ethical ideals like open-mindedness, acceptance, tolerance, and democracy deteriorate, which is concerning.

I'm curious - does anyone else think that the equality that matters is equality in material outcomes? I think that would be such a boring world. The real equality that matters is equality in dignity as human beings, equality before the law, equality in our respect to each other. I think the developed world has made monumental strides on these fronts, which are spreading around the world too. (Even though, of course, there is still work to be done).

Incidentally, I think even though (as Piketty claims) inequality may be increasing, the average person (certainly in developed nations, but also in developing ones) has also been unimaginably enriched over the past 200 years. By any ethically relevant standard (access to food, shelter, heating, technology, entertainment), we live unbelievably fortunate lives. This when our ancestors a mere 3-4 generations ago were unspeakably poor.

GM Michael Stean lost to Cyber 176 (a mainframe 'supercomputer') in 1977 (at blitz). AFAIK this was the first time a computer defeated a GM; they began defeating IMs and experts some ten years before that. Kasparov himself lost to Fritz 2 at blitz as early as 1992.

Basically don't overestimate how much the 'adults' understand. There is a huge amount of hand-waving, FOMO, leaps of faith, etc... by VCs when they make (and manage) investments. When things work, they are explained ex-post facto in visionary terms. When they don't... people forget soon anyway.

But all too common on the buy-side, e.g. in PE/VC, and even most public equity investors.

I think the skills are OK. I find the average personality type I encounter in finance a bit abrasive: one-dimensional, sharp-elbowed, too full of certainties. I worry that this might be a general phenomenon in the corporate world :/ (of course, these people also tend to be much much happier).

The 'sigh' was almost reflexive: even writing the word 'finance' makes me feel bored.

This is an error in the article, and the responses above are incorrect. 'Ten on thirty' means $10 million invested at a $30 million pre-money valuation, with a post-money valuation of $40 million. This means that the $10 million acquires 25% (NOT a third) of the company.

'Ten on fifteen' would mean $10 million invested at $15 million pre-money, giving $25 million post and the investors 40% of the company. And so on.

Investors almost always speak on a pre-money basis: thus, $15 million pre-money is half of $30 million pre-money.

Here's what's scary: both could be right. Each interprets and constructs meaning from various gestures, actions, words, etc., through their own lens, especially retrospectively.

For example, guy and girl go out to dinner, have a great time, have a couple of glasses of wine. Girl goes back to guy's apartment; they are both light-headed, and end up having sex. Months later, after a breakup, the girl legitimately believes she was taken advantage of ('The asshole was using me all along; he plied me with wine and raped me'), while the guy legitimately believes that what happened was 100% consensual. It is obvious why after a tough break-up the girl may (choose to?) think this way. Also, she IS on some level right: the guy DID want to have sex with her, and the dinner and wine weren't a completely innocent gesture. But guess what: this is what relationships are like, and these situations are virtually impossible to avoid. Every relationship I've been in has had similar 'open to interpretation' moments.

Anyway, this is one reason why relationships today are sometimes an absolute hell; we live in a culture that encourages us to treat everything as means rather than end, including people, and at the same time we are obsessed with ourselves--obsessed with protecting our beautiful, world-deserving self, and are terrified that we might be being used, or that we might be using or accused of using others.

A nice effort, but it is jarring to see a simple word misspelled (twice) in the Arabic text in the headline image, a result of which is that instead of 'Print' the text says 'Follow' (specifically: instead of "Ittba'", with a hard 't' sound, which means 'Print', the text says "Itba'", with a soft 't' sound, which means 'Follow'; these two different 't' sounds are represented by two different letters in the Arabic language).

This type of oversight makes the work instantly less relatable (and credible) to Arabs.

They can and they do. Here are some ways:

1. Management makes a share issuance, diluting all existing shareholders by X%. Management then turns around and distributes shares amongst themselves. Something like this can happen if management have majority control and can get approval from their VCs/preferred shareholders (who have reserved matters that can block share issuances). Often, the VC can work with management to get something like this done.

(A more complicated version of this happened with the Zuckerberg/Saverin saga).

2. An option pool--say 10%--is issued as part of an investment round. This dilutes all shareholders by 10%. The Board then distributes the option pool to key management. There's nothing a minority shareholder can do.

A few comments:

1. The scenarios illustrated in the piece seem horrible but are biased. Consider this: a VC invests $20 million in a business and acquires 50% of it, valuing it at $40 million post-money. Assume the remaining 50% is owned by founders/key employees. Five years down the line, the company hasn't done so well and is sold for $10 million. Without a liquidation preference, the founders and key employees get $5 million: a decent payout for losing $15 million of investor money.

2. Fred Wilson repeatedly makes the point that when VCs invest in a company at a valuation of $X million, they are not valuing the outstanding stock of the company at $X million the same way a public market would. Instead, what they are doing is buying a bond + an option. The liquidation preference is the bond part of the equation: the investors are betting that the company is worth at least its liquidation preference (which, at 1X, is the amount they invested). The upside that the company might have if it succeeds is the (deeply out of the money) option.

3. Today, 1X liquidation preferences are standard and widespread, and entrepreneurs have it good. If you want your eyes to water, go read/ask about liquidation preferences in term sheets after the dot-com crash ;)