The difference is significant: the real return between the best and worst
can easily be 2x.
Given that this is effectively a venture capital moon-shot as opposed to a
normal savings plan type investment, a variance of 2x is not as much as it
initially seems (and we would, of course, do whatever we could to avoid the
worst of the worst cases).
(Depending on your specific type of interest in a company, an argument
can be made that warrants can be more valuable than equity.)
Warrants have the same control problems as options do -- magnified by the
fact that they are transferable. They are definitely not what I would call
acceptable for this purpose.
Since many startups in Silicon Valley do exactly this, I would say that
it is quite doable. It is less flexible and accurate than waiting until
the end to make determinations of value, but it is a fair proxy and both
parties have to agree to it anyway. If structured well, bits can
frequently be negotiated off-contract later if conditions change. It is
how startups deal with things like high rates of churn.
I would argue that while it is doable when there is a relatively small
number of people, when the people know each other, and when they have a
reasonable amount of "togetherness" time -- I don't see it working in the
proposed circumstances.
= = = = =
You *are* giving good solid financial advice and I *do* appreciate it. I'm
just not seeing a good, clean way to do everything that I want to do (which
is really a sad commentary on the current state of regulation).
Mark
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