Essay · 12 min read

The Equity Equation

Paul Graham · paulgraham.com Free Intermediate

When a term sheet lands and you are tempted to fight over the last point of valuation, this is the essay that reframes the decision. Graham reduces the whole dilution question to one line: give up n percent only if it makes the remaining (100 - n) percent worth more than the whole company was before, formalized as the 1/(1-n) break-even multiple (take 7 percent, the deal has to lift value by more than 7.5 percent to pay off). It teaches you to judge an offer on your average outcome, not on a valuation you can brag about.

  • Accept dilution only when the money improves your average outcome enough that the smaller slice you keep is worth more than the whole company was before
  • The break-even test is 1/(1-n): give up 7 percent and the raise must increase company value by more than 7.5 percent to be worth it
  • Valuation is not the thing to optimize: optimize the size of your slice of the eventual pie, which means picking money and terms that actually grow the company
Open on paulgraham.com ↗

It answers 2 questions

  1. What equity should I offer a technical co-founder vs. an early engineer?
  2. How do I actually value a pre-revenue startup, and where does the seed number come from?

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