5 ms·

You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would

You might not work any less hard, but you'll certainly take more risks if you don't experience the downside. Answer quickly - how much of your net worth would you risk on a bet with 1% chance of a 1000X payout? Now how much would you risk if you can hand off 90% of any loss you take to someone else? The difference is what we call moral hazard: http://en.wikipedia.org/wiki/Moral_hazard http://en.wikipedia.org/wiki/Moral_hazard

Anderkent 13y ago
I can't see how that's a bad thing in this context. The investor is fully aware that you'll take risks with his money - he's hoping that one of these risks will pay off hugely, if not with you then with some other startup he's invested in.
LBarret 13y ago
It works like this because most investors prefer winning 100x their investment 1% of the time. Business angel are a bit different but VCs really think that way.
nl 13y ago
I understand many on HN aren't particularly keen on getting a job with a normal wage, but saying that is a moral hazard is pretty extreme. Re-read the comment. An early employee is paid a salary, and they also get options. The OP's point is that receiving the salary and options means your risk profile is different. There's no moral hazard here, unless you believe receiving a salary is a moral hazard.
erichocean 13y ago
you'll certainly take more risks if you don't experience the downside The entire reason VCs give you the money is to take more risk. That's, literally, the point. So you do understand things correctly, yet came to the wrong conclusion that VC were somehow being wronged by this.
rdl 13y ago
If you had a machine which would charge $1 for a 1% chance of winning $1000 in 1 year, you could fairly charge people somewhere between $5 and $9.50 per pull of the handle. You'd have an exceptionally long line waiting for that deal. The whole point is rich people, investment portfolios, etc. have an entirely different risk profile than individuals. For an individual, low-probability high EV (high variance) is dangerous, which is why you buy insurance -- essentially negative EV (a 100% chance of losing either $1 or $2, but not losing your $1000).
CapitalistCartr 13y ago
Taking a crazy risk is what the VC is paying you to do. If it didn't take a crazy idea to make it big, everyone would see it, and many would be doing it. From the point of view of the VC: how much of your net worth would you bet on a 1% chance of a 10K payout, if you cold make dozens of such bets?

Anderkent 13y ago

I can't see how that's a bad thing in this context. The investor is fully aware that you'll take risks with his money - he's hoping that one of these risks will pay off hugely, if not with you then with some other startup he's invested in.

LBarret 13y ago

It works like this because most investors prefer winning 100x their investment 1% of the time. Business angel are a bit different but VCs really think that way.

nl 13y ago

I understand many on HN aren't particularly keen on getting a job with a normal wage, but saying that is a moral hazard is pretty extreme. Re-read the comment. An early employee is paid a salary, and they also get options. The OP's point is that receiving the salary and options means your risk profile is different. There's no moral hazard here, unless you believe receiving a salary is a moral hazard.

erichocean 13y ago

you'll certainly take more risks if you don't experience the downside The entire reason VCs give you the money is to take more risk. That's, literally, the point. So you do understand things correctly, yet came to the wrong conclusion that VC were somehow being wronged by this.

rdl 13y ago

If you had a machine which would charge $1 for a 1% chance of winning $1000 in 1 year, you could fairly charge people somewhere between $5 and $9.50 per pull of the handle. You'd have an exceptionally long line waiting for that deal. The whole point is rich people, investment portfolios, etc. have an entirely different risk profile than individuals. For an individual, low-probability high EV (high variance) is dangerous, which is why you buy insurance -- essentially negative EV (a 100% chance of losing either $1 or $2, but not losing your $1000).

CapitalistCartr 13y ago

Taking a crazy risk is what the VC is paying you to do. If it didn't take a crazy idea to make it big, everyone would see it, and many would be doing it. From the point of view of the VC: how much of your net worth would you bet on a 1% chance of a 10K payout, if you cold make dozens of such bets?