VC Part 2: Fuck-off Money(danielharan.com)
danielharan.com
VC Part 2: Fuck-off Money
http://www.danielharan.com/2008/09/04/vc-part-2-fuck-off-money/
12 comments
Isn't it "fuck you" money not fuck-off money? 500K is barely fuck you money, more like "screw you I'm working slightly less each year money"
I've always heard it as fuck-you money. Meaning you can afford to say, "fuck-you" to anyone you want (boss, your competition, a cop, etc...) and not have to worry about paying your bills tomorrow.
On this topic, I've only ever heard people who don't have fuck-you money call it fuck-you money.
Nassim Nicholas Taleb did, so you're wrong: http://www.portfolio.com/views/columns/the-world-according-t...
Sorry about making this slightly pointless comment :(
Sorry about making this slightly pointless comment :(
On an unrelated note, I think people gives Taleb too much credit. Sure, he's a fantastic author and the points he bring up are interesting and noteworthy but he isn't a good trader. I just don't understand why retail investors like to think that Taleb is in the same league as Ken Griffith and worship Fooled by Randomness/Black Swan as a trading bible. It's not. If you try to apply his principles on the market, you'll bleed to death slowly and maybe once a while during a Black Swan event, you get a blood transfusion but in the long run, you'll die. There's a reason why those out-of-the-money options are cheap. It's called probability.
Pretty sure the author is Canadian. They tend to say things differently.
Why are you trying to talk about "the least amount of money I can get in order to get by"?
I don't really understand this whole "my odds of doing something really small are high, so f* you all, I'm doing that. F* VCs, f* the world, f* working a lot."
That's a terrible attitude if you actually are in this because you enjoy it and want to make a meaningful contribution to society, and not just make some petty money.
And I can already feel the downvotes. Everyone angry at Mr. Cynical because he crashed the "F* VCS!" rally.
In the words of 8Ball and MJG: "Yo stupid ass ain't gone live twice. If you do anything, do it big. If you do it small, do it big."
I don't really understand this whole "my odds of doing something really small are high, so f* you all, I'm doing that. F* VCs, f* the world, f* working a lot."
That's a terrible attitude if you actually are in this because you enjoy it and want to make a meaningful contribution to society, and not just make some petty money.
And I can already feel the downvotes. Everyone angry at Mr. Cynical because he crashed the "F* VCS!" rally.
In the words of 8Ball and MJG: "Yo stupid ass ain't gone live twice. If you do anything, do it big. If you do it small, do it big."
pg's opinion (it would seem):
[9] There are two ways to do work you love:
http://paulgraham.com/startuplessons.html
[9] There are two ways to do work you love:
(a) to make money, then work on what you love, or
(b) to get a job where you get paid to work on stuff you love.
http://paulgraham.com/startuplessons.html
The point he makes is good, but the calculation seems wrong. He's using odds interchangeably with percent ownership, when the two are clearly different.
50% odds of making $1 million = you have a 50/50 chance of walking away from the company with $1 million at some point -- not that you're guaranteed to walk away with $500K. You could just as easily walk away with $0.
So if your two options are: 1) 50% odds of making $1 million 2) 20% odds of making $20 million
...then you're more than twice as likely to make money on the first deal than on the second.
50% odds of making $1 million = you have a 50/50 chance of walking away from the company with $1 million at some point -- not that you're guaranteed to walk away with $500K. You could just as easily walk away with $0.
So if your two options are: 1) 50% odds of making $1 million 2) 20% odds of making $20 million
...then you're more than twice as likely to make money on the first deal than on the second.
I think his point was that individuals who aren't already wealthy have to make their decisions based on the odds of payout on that deal, while investors can simply engage in more deals, thereby reducing the "odds" to a simple payout multiplier.
Reading it again, I see where the confusion lies - but I didn't even want to get into the issue of ownership.
The $500k is only the "expected value". You have a 50% chance of making $1M, 50% of walking away with $0.
"then you're more than twice as likely to make money on the first deal than on the second."
And that's why I'd choose the first deal, even though the economically 'rational' thing to do is to go for the second, which has higher expected value.
The $500k is only the "expected value". You have a 50% chance of making $1M, 50% of walking away with $0.
"then you're more than twice as likely to make money on the first deal than on the second."
And that's why I'd choose the first deal, even though the economically 'rational' thing to do is to go for the second, which has higher expected value.
Personally I'd take the second deal, but that's just because I don't consider $1 million to really be "fuck you" money at all -- it'd buy me a nice house and give me a good head start, but it wouldn't let me retire and spend the rest of my life doing whatever-the-hell-I-want the way $20 million would.
His point still stands, of course, if you multiply the numbers by something. Make it a 50% chance of $10 million vs a 20% chance of $200 million, and I'd probably take the first deal.
His point still stands, of course, if you multiply the numbers by something. Make it a 50% chance of $10 million vs a 20% chance of $200 million, and I'd probably take the first deal.
there are two sets of percentages in the article, they just happen to be the same. 50% ownership in a company with a 50% chance of making $1 million, versus 20% ownership in a company with a 20% chance of making $20 million.
using the same percentages for both thing is maybe a little confusing, and it's not explained terribly well. the numbers are really immaterial to his point -- going for short money on good odds is better than going for ridiculous money on long odds. keeneland teaches me the same thing every spring and fall at the meets.
using the same percentages for both thing is maybe a little confusing, and it's not explained terribly well. the numbers are really immaterial to his point -- going for short money on good odds is better than going for ridiculous money on long odds. keeneland teaches me the same thing every spring and fall at the meets.
He doesn't talk about ownership, those are "expected value" calculations: basically, how much you would expect to make per deal if you did 100+ of these deals.
to answer the article's question:
$440k. done.
here's the rationale:
$200k pays off all the debt i have: mortgage, car, everything, and should leave me with $50K in a working capital cushion. i would continue to work on something, because i'd go crazy if i didn't, but it'd likely be another startup idea of some sort. maybe work on student incubation.
$240k goes in a ladder of 1 year certificates of deposit at $20k each. at around ~4% interest, each one will yield an income of ~$800/month. i can leave that in the bank, or take it out as income. given that we're at record low interest rates, that rate can be expected to go up. it's not the best rate that could be earned, but it's a guaranteed rate.
my monthly expenses once housing and car payment are removed are right at $300. $800/month leaves me $500 for food and incidentals, assuming i don't have other income. no, it's not lavish, but it works. and every single penny i make from paying work i can then blow on hats.
of course, if i just keep rolling the yield back into the CD by retirement age (i'm thinking 55) each CD will be worth $70K, yielding 2800/month.
so in short, if my fuck-off-you money is $440k, i'm in pretty good shape for the rest of my life.
$440k. done.
here's the rationale:
$200k pays off all the debt i have: mortgage, car, everything, and should leave me with $50K in a working capital cushion. i would continue to work on something, because i'd go crazy if i didn't, but it'd likely be another startup idea of some sort. maybe work on student incubation.
$240k goes in a ladder of 1 year certificates of deposit at $20k each. at around ~4% interest, each one will yield an income of ~$800/month. i can leave that in the bank, or take it out as income. given that we're at record low interest rates, that rate can be expected to go up. it's not the best rate that could be earned, but it's a guaranteed rate.
my monthly expenses once housing and car payment are removed are right at $300. $800/month leaves me $500 for food and incidentals, assuming i don't have other income. no, it's not lavish, but it works. and every single penny i make from paying work i can then blow on hats.
of course, if i just keep rolling the yield back into the CD by retirement age (i'm thinking 55) each CD will be worth $70K, yielding 2800/month.
so in short, if my fuck-off-you money is $440k, i'm in pretty good shape for the rest of my life.
The word inflation is conspicuously missing from your analysis. There's a reason why people bother with stocks instead of just plopping all their money in CDs.
(You could buy inflation-adjusted bonds. Last I heard, though, they were running slightly negative yields because of all the other people who want to buy inflation-adjusted bonds.)
The other problem I see here is that this is a steady-state analysis. If you sustain one event that requires you to deplete your capital (like, say, a sudden surge in inflation, a sudden fall in interest rates or market values, an illness... or, god forbid, you decide to get married or have a kid or move to a nicer house) you will immediately suffer an income hit that will require you to go back to work. You should consider budgeting for such things.
Having said that: If you have the discipline to follow this plan, minor holes and all, you'll be in better financial shape than the vast majority of the planet.
(Obligatory investment-book recommendation: William Bernstein, The Four Pillars of Investing.)
(You could buy inflation-adjusted bonds. Last I heard, though, they were running slightly negative yields because of all the other people who want to buy inflation-adjusted bonds.)
The other problem I see here is that this is a steady-state analysis. If you sustain one event that requires you to deplete your capital (like, say, a sudden surge in inflation, a sudden fall in interest rates or market values, an illness... or, god forbid, you decide to get married or have a kid or move to a nicer house) you will immediately suffer an income hit that will require you to go back to work. You should consider budgeting for such things.
Having said that: If you have the discipline to follow this plan, minor holes and all, you'll be in better financial shape than the vast majority of the planet.
(Obligatory investment-book recommendation: William Bernstein, The Four Pillars of Investing.)
you're quite correct -- there is no mention of inflation. this is mainly because i don't know how to not work. i've tried it. i fail pretty hard at not working. but at the point where you have this steady income, any job you take contributes strongly to your personal wealth -- much more so than if you didn't have the debts settled and the regular income.
any extra income from work (that i didn't blow on hats, mind you) would go into a managed fund, most likely an index fund. days like today though happen periodically, and individual stocks require the kind of detail work that isn't cost effective at those amounts. i make more money working than the growth i would see in the stocks having spent the same time on it.
all that said, if the current project gets picked up ...
any extra income from work (that i didn't blow on hats, mind you) would go into a managed fund, most likely an index fund. days like today though happen periodically, and individual stocks require the kind of detail work that isn't cost effective at those amounts. i make more money working than the growth i would see in the stocks having spent the same time on it.
all that said, if the current project gets picked up ...
... certificates of deposit at $20k each. at around ~4% interest, each one will yield an income of ~$800/month.
Shouldn't that be "each one will yield $800/year"? That makes the total $800/month.
Shouldn't that be "each one will yield $800/year"? That makes the total $800/month.
[deleted]
each one would yield $800/year, true, however you put one in a month such that they come up at the end of the year. 12 CDs, one for each month, each yielding $800/year.
sorry if that was unclear.
sorry if that was unclear.
Your Money Or Your Life is a guide for reaching your fuck-you money goal:
http://www.yourmoneyoryourlife.org/fom-about-summary.asp
http://www.yourmoneyoryourlife.org/fom-about-summary.asp
If it's me, the chance of payoff is a multiple of their expected multiple. I'm in for the 20 mln.
Anyone else using Ubiquity who went to this site? It asked me if I wanted to subscribe to his Ubiquity commands but I don't know what they do.
usually the percentages you see are different: "would you rather have 20% of 10 million or 100% of 0"
I would negotiate to an equity stake of at least 150% of 0.
Fuck-you money is an illusion. A person with $1 million is not going to want to live a lower-middle-class lifestyle, and the fact is that there is no way to guarantee high (7-10%) returns; equity markets are actually likely to struggle for the next decade. Most people who have a chance at $20 million would be bored without work and, of course, want to work on the best projects with the best people. This desire ensures that they can't be entirely independent, although they have more freedom than the average person.
It's better to just accept that complete independence is an delusion. I hope to make a lot of money one day, but I don't harbor the illusion that it will exempt me from interdependence with other people.
It's better to just accept that complete independence is an delusion. I hope to make a lot of money one day, but I don't harbor the illusion that it will exempt me from interdependence with other people.
Even if you can't spend the rest of your life like this, and eventually have to get back to making money, you could easily go 10 years or so.