New line of business

I’m considering a new line of business. This is basically advising startups on option valuation and how to account for different conditions and optionalities that venture capitalists put in in term-sheets.

Aswath Damodaran has an extremely interesting piece on valuation of the so-called “unicorns” and how such valuations are inflated on account of optionality in favour of investors. He takes a stab at valuing such optionality, but I think there’s scope for going deeper and helping companies figure out the valuations in each individual case. Money quote from the piece:

As an outsider with an interest in valuation, I find venture capital deals to be jaw-droppingly complex and not always intuitive, and I am not sure whether this is by design, or by accident. When it comes to investor protection, the stories that I read for the most part are framed as warnings to owners about “vulture capital” investors who will use these protection clauses to strip founders of their ownership rights. I think the story is a far more complex one, where both investors and owners see benefits in these arrangements, and where both can expose themselves to dangers, if they over reach.

Do you think this is a good line of business to get into? Will startups be willing to pay for a service that allows founders to get value for money for the equity they are giving away? Or will they be so focussed on execution that trifles such as a change in valuation by a few percentage points don’t matter to them any more?

And what are the odds that if I get into this business and do a good job of it, a VC will want to hire me just so that I stop damaging their carefully designed ratchets?

3 thoughts on “New line of business”

  1. I think there’s definitely a market, but some caveats. In the Valley, this is typically done by lawyers who charge an arm and a leg for such services, or by accelerators like YCombinator (but only if you get into an accelerator) – so there could well be a market opportunity to disrupt high lawyer fees for this kind of advice. But usually founders tend to consult law firms for this so you need to explain why you’d provide better or more valid advice (at least over there).

    There could well be a market in India or other emerging markets if startup-specialized lawyers have not stepped in there too to fill the gap.

    1. This post was largely in jest, though I’m myself not sure if I was being serious or ironic when I wrote it. Maybe a superposition of the two.

      Ok lawyers might be good at setting terms and drafting and ensuring watertight provisions, but from my opinion they are no good at option pricing! And option pricing forms a major role in the structuring of such deals! That’s where I’m saying I want to come in

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