[GlibMonkeyDeath]

He was talking about an equity stake in a start-up. Although on paper it is worth $2M, it is (probably) not liquid (i.e, the shares can't be traded easily, maybe at all.) The vast majority of founders don't literally spend $2M from their checking account to purchase their position in a start-up - they get some ownership as part of taking the start-up risk.

[oreally]

Is there some standard he/people use to come up with the initial company paper-stock worth? A 2m company I would imagine needs to have some tangible traction already.

[GlibMonkeyDeath]

Of course - at founding, if $20M goes into the company at $1 per share, and the CEO gets a 10% equity stake (usually subject to restrictions), then the CEO has $2M on paper (or will have after possible vesting.) Real money in this case came from the original investors that flowed into the company in exchange for ownership, but the CEO can't really do anything with his shares yet. At this point the original investors are taking a huge risk with their money - chances are, they just lost $20M dollars, and probably even more, as it can often take a long time of putting good money after bad.

Once a company starts operating, but before revenue (and hopefully eventual profitability), the valuation is trickier. The share price _should_ be the number of shares divided by the sum of all future profit (minus current debt.) Which is hilarious of course, because no one actually knows the denominator.

That original $2M equity stake can grow to billions if the company ends up making something that a lot of people want or need, so the sum of all future profit is large. Or, much more likely, it will be worth nothing, or a modest amount.

Graham's essay kind of avoids the point of whether ownership of a vastly appreciating asset is "fair", if a bunch of other people help that asset to appreciate.

[oreally]

But these are still numbers plucked from the air (or as you put it, from the 'future'). I want *tangible, material bases* to start from if any.

Another far more sensible model I've found is slicing pie. Each founder's input % of the pie pre-'bake' is their % of the rewards. And what makes up for one's slice of the pie? The dollar-value you would've earned if you worked somewhere else, times the period of baking. These can be tweaked accordingly to the type of investment put in. IMO, it seems far more grounded compared to say a flat 10%.

[GlibMonkeyDeath]

To quote good old Chester Karass (https://www.amazon.com/Business-Life-Dont-Deserve-Negotiate/...): you get what you negotiate. In an ideal world, people are compensated according to their contributions (and when hired, expected contributions.) This isn't a once-and-done thing, though - compensation (in the form of company ownership) gets adjusted all the time. The flat 10% is just a starting point (a typical CEO level of ownership in a start up, although this number varies quite a lot, due to aforementioned negotiation.) If a CEO screws up badly enough, they might get fired even before their stock vests.

[oreally]

Sure I'd acknowledge the risks taken. Arguably though, there should be some degree of a known benchmark just so people don't get overly taken advantage of.