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I often talk to founders, employees and angel investors about whether they should sell into a later stage round, where new investors are willing to make secondary purchases of stock. This spreadsheet provides a calculus to help you figure out whether you should sell in such a situation
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N.B.: This just for individuals - not institutional managers - because institutional managers have a broader set of stakeholders to consider and their personal situation is perhaps the least relevant when making an exit decision.
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You can edit or make a copy for yourself by clicking on the 'File' menu above.
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I think this calculus is helpful because the output of the calculation gets you to confront some hard questions. Namely, the following.
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1. How much money would make a difference to my life now? What amount of money would enable a step-change in my life, or just feeling about life? For example, would buying a house make you/your family feel more secure, enable you to setup life in the way you want, or otherwise? This helps you figure out how much to sell now vs hold.
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2. The same as above, but in the future. This is harder because you have to think about your future self. That is, how much money will enable the next step-change in my life? I like to frame this as, how much will enable the final step-change? What's the 'end-game' life look like, what does it cost and could I enable it through exiting this investment? This is a check against the above consideration.
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3. The difference between the two, expected values. This is even harder because you have to fight greed! Sure, having more money is always better, but would the difference between what you could get now, and what you could get in future really change your life? This question gets to the point of the exercise: sell or hold?
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Here's how it works.
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- across the top (row 3) you have scenarios based on how much you sell now (often one doesn't have a choice so two scenarios are enough, i.e. none or all of what you're able to sell, but you can add more)
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- down the left (columns A and B) you have the quanta of exit (x) and probability (%) of each quantum (you just have to guess or ask an experienced investor for these inputs)
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- the far right (column E) shows the difference at each exit quantum
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- the bottom (row 10) shows the expected value, i.e. quantum * probability across all potential outcomes.
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- the final number (row 11) shows the potential difference in expected values across the scenarios.
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The final number (11D) is what you can key in on but it's worth considering if any of the numbers on the far right (Column E) 'jump out' at you as representing a difference in potential lives.
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Some of the table is repetitive/obvious, e.g. the numbers on Column E are obviously the same % that you input to sell * Column C, but it's laid out this way to encourage thinking about different outcomes, in different terms.
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Imagine that buying a house in your neighborhood costs $1MM and but putting down $100K up-front would mean the monthly mortgage payments are too high. However, putting down $400K up-front would make the mortgage payments tolerable, and thus allow you to buy a house. If this were the case, and $750K won't make a difference to you in future, at the point where you'd get $6.75MM from an exit, then you should sell 10% now.
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Feel free to email me with any questions: ashfontana@gmail.com.