Thread by @patio11

Inbox: "What do you think about equity in startups?"

Consider it from the perspective of a founder choosing between businesses to run. There are some businesses where even the success case for the business is a failure for you. There are other much more attractive businesses.

Neither "You should run a business; there's more freedom in running a business than anything else you can do" and "You shouldn't run a business; nobody makes money in business, not really" are very representative of the truth.

Some people believe businesses to be very difficult to determine the quality of ex-ante. I once held this opinion. On the basis of substantial experience, I believe I'd be much better at selecting successful businesses today than I was 15 years ago.

I also believe that the fundamental insights there are not particularly Deep Magick but rather are teachable.

For example: ceteris paribus, if you don't have a billion dollars or the best distribution machinery around to subsidize you, B2B >>>> B2C for software companies.

I will add, and note that it is extremely socially awkward of me to elaborate further, that of 3+ million words I've written I counterfactually regret few claims more than (approximately) "You should value equity near zero." Believe that when I wrote it; have gotten smarter.

If the numerator is "companies at which people granted equity do well" and the denominator is "companies at which people are granted equity" -> low %.

If the numerator is "people granted equity do well" and the denominator is "people who are granted equity" -> much higher %.

The difference between the two is that companies which materially derisk their businesses and are seen as doing so by investing professionals (and/or by customers) end up hiring vastly disproportionately to companies which are pre-derisking.

For a window, and a *shockingly long* window, they build a material amount of their compensation strategy around equity grants.

"AppAmaGooFaceSoft all build a material amount of their compensation strategy around equity grants, Patrick."

I am aware of that, voice in my head.

I am low-key concerned about geeks treating equity not as a financial instrument with a payoff function attached to it and more as a tribal signifier, because the amount of the cakes geek bake which is denominated in equity is *extremely large.*

To reprise yesterday:

If you loudly advance the opinion "I value equity at approximately zero" then people who have an informational advantage regarding what the equity is worth will say "Got it, in cutting this cake, I hear you want less equity and more flavors of fizzy water at the office."

I know there are some people who *say* variants of that who do not *believe* it (i.e. would not take the trade "4 years of your equity for a new Playstation, let's go, it's worth zero"), but tribal beliefs become *very real* for young and unsophisticated people.

"Are you claiming people saying that are being disingenuous?"

There are beliefs near and dear to my heart where you could ask me about the truth value, I'd be an automatic yes, and where I'd not weight them highly when making consequential decisions. People are complex.