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?