notes-business-startups-startups-stAnatomy

Contents

The anatomy of a startup

The functional anatomy of a company

• https://news.ycombinator.com/item?id=779448
• http://spencerfry.com/whats-a-non-programmer-to-do
• http://spencerfry.com/new-responsibilities-in-2010
• http://spencerfry.com/whats-a-non-programmer-to-do-advanced
• task list in http://blog.staply.co/startup-legal-do-it-by-yourself

The anatomy of an investment (capital structure)

startup lifecycle

mosquito

startup roles and ppl and ecosystem

Kelly criterion and portfolios of high risk, high return investments

scalable business models and investors

the financial anatomy of a startup

the scale of money

e.g. how much is a mall worth, how much is Oracle worth, ycombinator's grant, 'seed round', 'A round', etc

public vs private companies

In a sense investors buying shares in a startup is similar to when you buy shares of companies on the public stock market, but there are some important differences.

First, multiples are lower for private companies compared to public ones (todo cite), suggesting that the same company would be worth less private than it would be public. This could be because only a much smaller pool of investors is legally allowed (in the US) to invest in pre-IPO companies, pushing down demand; it could be because less information is known about private companies, and private companies are not subject to the same stringent (and expensive) anti-fraud laws as public ones; it could be due to a selection bias (maybe the best companies tend to be public).

Second, when you buy stock in a public company, you are typically buying "common shares". But typically startup investors buy "preferred shares". A company can create different classes of stock, and concoct all sorts of weird contractual terms which only apply to the holders of some of these classes. Typically holders of "preferred shares" have special rights that holders of common shares don't. These special rights change the incentives and payoffs for these investors, to such an extent that their situation is very different from ordinary shareholders.

For example, startup investors often are given a special right called "liquidation preference", which means that if the startup loses money and then is sold or liquidated, the investors are paid before others are. This seems like a minor detail but it means that in some situations, investor payoffs can be more similar to debt than to equity. For example, if a startup is valued at $9 million dollars, and then an investor puts in $1 million dollars to buy 10% of the company, and they are given a "1x liquidation preference", that means that if the company is sold or liquidated, they must be paid at least $1 million dollars before the commons shareholders get paid anything at all. Assume that they are the only investor. If the value of the company then declines to around $5 million dollars, then the investor's stake would only be worth about $500k without the liquidation preference; in fact, as long as the company's valuation stays between $1 million and $10 million dollars, the investor would get the same amount back in the event of a sale or liquidation ($1 million) (for the purpose of this example, we define 'valuation' to mean how much the company could be sold for). If this investor ceases to believe that it is likely for the company to exceed a valuation of $10 million in the future, then they no longer have a reason to care if its valuation is $3 million or $8 million; like a lender, and unlike a prototypical shareholder, this investor becomes more concerned about getting their money back safely than about the company's prospects for growth.

todo

"Marketing, Sales, Implementation, Support, on top of G&A, and that's not even touching on HR and retaining employees in a competitive market."

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https://www.backblaze.com/blog/startup-stages-surviving-your-first-year/