As someone who's double majoring in Economics & Commerce with a double concentration in Finance & Accounting while simultaneously pursuing a masters degree in Accounting, YES you might say I'm brainwashed.
However, society brainwashes us all in some way - don't you think?
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OK, let me try to condense 4 years of finance education into few paragraphs, so that I can point out the fundamental errors you're making:
First, you have to understand the capital asset pricing model (CAPM): E(r) = B(Rm + Rf) + Rf
E(r) = Expected return; B = beta = the risk of a firm; Rm = the market risk premium; Rf = Risk free rate
OK, so the capital asset pricing model basically states that the riskier the investment, the higher the return the market will demand. This makes sense. Investing in McDonalds is much safer than investing in Justin.TV, because you're almost guaranteed that McDonalds will be around in 5 years.
This is why VCs demand a 30-40% expected return - because there's a very high risk the companies will fail. This isn't "unfair" - this is how the stock market, and the rest of the financial world, works. When you buy a stock, its price has been shown to correlate to the expected risk. Higher risk stocks earn a higher return, as predicted by the CAPM.
Now, I think you're confusing debt with equity. Of course you could take out $15,000 of debt for 9%, but you're entering into a contract to repay it. If you don't, they get your house, car, etc. This is why the debt isn't as expensive - the bank knows they're getting their money back, one way or another. The bank is using the same CAPM calculation, except with a lower beta.
Finally, if you choose equity, you obviously will want to go with the firm that values you the highest (and gives you the best deal). The argument I was making is that YC already values these startups at a very high level. It's not very often that someone will value 3 months worth of your work for $332,000K [($15K/5%) x (1.5^0.25)].
However, society brainwashes us all in some way - don't you think?
====================================
OK, let me try to condense 4 years of finance education into few paragraphs, so that I can point out the fundamental errors you're making:
First, you have to understand the capital asset pricing model (CAPM): E(r) = B(Rm + Rf) + Rf
E(r) = Expected return; B = beta = the risk of a firm; Rm = the market risk premium; Rf = Risk free rate
OK, so the capital asset pricing model basically states that the riskier the investment, the higher the return the market will demand. This makes sense. Investing in McDonalds is much safer than investing in Justin.TV, because you're almost guaranteed that McDonalds will be around in 5 years.
This is why VCs demand a 30-40% expected return - because there's a very high risk the companies will fail. This isn't "unfair" - this is how the stock market, and the rest of the financial world, works. When you buy a stock, its price has been shown to correlate to the expected risk. Higher risk stocks earn a higher return, as predicted by the CAPM.
Now, I think you're confusing debt with equity. Of course you could take out $15,000 of debt for 9%, but you're entering into a contract to repay it. If you don't, they get your house, car, etc. This is why the debt isn't as expensive - the bank knows they're getting their money back, one way or another. The bank is using the same CAPM calculation, except with a lower beta.
Finally, if you choose equity, you obviously will want to go with the firm that values you the highest (and gives you the best deal). The argument I was making is that YC already values these startups at a very high level. It's not very often that someone will value 3 months worth of your work for $332,000K [($15K/5%) x (1.5^0.25)].