[togilvie]

This is a nice analysis and good thinking, though it's worth noting that liquidation preference makes the VC equation less favorable. I'm not sure how Y Combinator works, but preference plays a shockingly large role when you run these types of calculations against your hypothetical VC deal.

[zach]

Given PG's formulation, liquidation preference plays no part in the value-of-equity equation, since it can be factored out into the average outcome.

But sure, it does tend to depress average outcome. Then again, if your outcome is dominated by the presence of very-high-value possibilities, a reasonable liquidation preference may be no big deal.