A Different Risk–Return Relationship
We challenge the widely accepted premise that the valuation of an early-stage firm is simply the capital invested (USD) divided by the equity received (%). Instead, we argue that this calculation determines the break-even point for the investor; for example, investing USD 1.0 in exchange for a 10% e...
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| Format: | Article |
| Language: | English |
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MDPI AG
2025-01-01
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| Series: | Risks |
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| Online Access: | https://www.mdpi.com/2227-9091/13/2/22 |
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| author | Aydin Selim Oksoy Matthew R. Farrell Shaomin Li |
| author_facet | Aydin Selim Oksoy Matthew R. Farrell Shaomin Li |
| author_sort | Aydin Selim Oksoy |
| collection | DOAJ |
| description | We challenge the widely accepted premise that the valuation of an early-stage firm is simply the capital invested (USD) divided by the equity received (%). Instead, we argue that this calculation determines the break-even point for the investor; for example, investing USD 1.0 in exchange for a 10% equity sets a firm-level free cash flow target of USD 10.0, resulting in a 0% return for the investor. The design of our study is that of a descriptive analysis of the phenomenon, based on three assumptions: that angel investing is a two-issue negotiation, that negotiation positions are communicated sequentially from capital to equity, and that the capital is fixed to a strategic trajectory. We note that when pausing the negotiation once a strategic trajectory (and thus capital) has been defined, utilizing the break-even point as the main reference point provides a structure that can serve as a guiding barometer for negotiators, as they evaluate their options across the full range of equity greater than 0% and less than 100%. We draw attention to the diminishing benefit of the marginal equity percentage point [diminishing at a rate of (−1/x<sup>2</sup>)] for the investor to break even on their investment. This relationship tracks to the equation [value = 1/equity], which presents the full option set for any offer, once the capital is determined. Our study provides the practitioner with the subtle benefit of situational awareness and the scholar with a logical foundation for future research. |
| format | Article |
| id | doaj-art-d541aeb6d9254e74bc8a0a02a2d3fde0 |
| institution | OA Journals |
| issn | 2227-9091 |
| language | English |
| publishDate | 2025-01-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj-art-d541aeb6d9254e74bc8a0a02a2d3fde02025-08-20T02:04:03ZengMDPI AGRisks2227-90912025-01-011322210.3390/risks13020022A Different Risk–Return RelationshipAydin Selim Oksoy0Matthew R. Farrell1Shaomin Li2Department of Management, Marketing & Entrepreneurship, Barney School of Business, University of Hartford, West Hartford, CT 06117, USADepartment of Management & Marketing, College of Business, Austin Peay State University, Clarksville, TN 37044, USADepartment of Management, Strome College of Business, Old Dominion University, Norfolk, VA 23529, USAWe challenge the widely accepted premise that the valuation of an early-stage firm is simply the capital invested (USD) divided by the equity received (%). Instead, we argue that this calculation determines the break-even point for the investor; for example, investing USD 1.0 in exchange for a 10% equity sets a firm-level free cash flow target of USD 10.0, resulting in a 0% return for the investor. The design of our study is that of a descriptive analysis of the phenomenon, based on three assumptions: that angel investing is a two-issue negotiation, that negotiation positions are communicated sequentially from capital to equity, and that the capital is fixed to a strategic trajectory. We note that when pausing the negotiation once a strategic trajectory (and thus capital) has been defined, utilizing the break-even point as the main reference point provides a structure that can serve as a guiding barometer for negotiators, as they evaluate their options across the full range of equity greater than 0% and less than 100%. We draw attention to the diminishing benefit of the marginal equity percentage point [diminishing at a rate of (−1/x<sup>2</sup>)] for the investor to break even on their investment. This relationship tracks to the equation [value = 1/equity], which presents the full option set for any offer, once the capital is determined. Our study provides the practitioner with the subtle benefit of situational awareness and the scholar with a logical foundation for future research.https://www.mdpi.com/2227-9091/13/2/22negotiationangel investingrisk–return relationshipcapitalequitybreak-even point |
| spellingShingle | Aydin Selim Oksoy Matthew R. Farrell Shaomin Li A Different Risk–Return Relationship Risks negotiation angel investing risk–return relationship capital equity break-even point |
| title | A Different Risk–Return Relationship |
| title_full | A Different Risk–Return Relationship |
| title_fullStr | A Different Risk–Return Relationship |
| title_full_unstemmed | A Different Risk–Return Relationship |
| title_short | A Different Risk–Return Relationship |
| title_sort | different risk return relationship |
| topic | negotiation angel investing risk–return relationship capital equity break-even point |
| url | https://www.mdpi.com/2227-9091/13/2/22 |
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