The Equity Equation

Paul Graham’s essay The Equity Equation presents a mathematical framework for evaluating equity trades: 1/(1 - n).

The Basic Principle

“You should give up n% of your company if what you trade it for improves your average outcome enough that the (100 - n)% you have left is worth more than the whole company was before.”

Investor Example

Trading 50% of your company requires doubling the company’s value to break even. For Y Combinator’s typical 7% stake, the startup needs improvement of 7.5% or more.

Top VC Advantage

Sequoia’s practice of taking ~30% equity (requiring 43% improvement) represents an exceptional deal because their brand value alone dramatically increases startup prospects.

Employee Stock Grants

An employee who increases company value by 20% deserves stock calculated as (i - 1)/i, yielding 16.7%.

My Takeaway

Always ensure equity trades leave you feeling financially richer. If the math doesn’t work, reconsider the deal.