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Venture Capital

Nikhil Basu Trivedi writes an article where he argues that the future may well see power of decisions move from Venture Capital firms to employees. He starts his post by highlighting a tweet made by Jack Altman that states that more power moving to employees is a natural continuation of a current trend that can already be seen where power is moving from Venture Capital to founders.

The trend that Nikhil points to to argue his point is the trend that companies now favor using lower evaluations of their company when they seed for money and also try to request as little money as possible. Now why would this be of interest to employees? Well we have two aspects to look at here, first we look at the amount of money that the firms raise. This money flows into the firm by creating new stock. The creation of new stock means diluting the amount of stock that is already held by employees which means that their stake in the firm becomes smaller. Talented people, it is argued, will seek out the firms where they believe themselves to have a bigger active stake in the outcome of the endeavour.

The second point concerns deliberately not going for the highest valuation of the company. A high valuation sounds like something that would only be positive, why would an employee wish their company’s evaluation to be low? With a high valuation the value of their stock would also be high. Well the argument is that you’d primarily be able to cash in on your stock once your company becomes publicly tradable during a IPO (Initial Public Offering). During the IPO one could state that your company is likely to be traded at what we could call its “real” value. If you have a high valuation before the IPO it is not likely that your shares will increase much in value, whereas if you keep having a lower valuation before going public there is more potential for the value of your stock to grow before the IPO.

I can sympathise with the first argument of the article. Regarding the second argument this assumes that new employees would have deeper insight into the intrinsic value of a company, which I find unlikely. How would someone be well poised to evaluate if a company’s evalation is low or high? This is not impossible, but I don’t believe the market is often times transparent enough for a layman to do an accurate evaluation. The one player that I think has the biggest interest in valuation being kept low is actually the Venture Capital firms. These will be the player that has the best insights into the market as a whole and have a firm understanding of how much a particular firm is worth.

Based on the arguments I have read I don’t reach the same conclusion that power is now shifting from Venture Capital to employees. At most I draw the conclusion that there is a market trend that’s playing well into the interest of Venture Capital where there is less risk in investments. There are points in the article I agree with. I agree that the employee has more at stake than an Angel investor in a startup project. This is of course depending on life situation but you might invest a lot of time into something that seems promising but in the end goes broke and gives you nothing in return. But employees having more. But that employees are becoming more powerful players in the market? Not really.