Document Type

Article

Publication Date

2025

DOI

10.3390/risks13020022

Publication Title

Risks

Volume

13

Issue

2

Pages

22 (1-27)

Abstract

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/x²)] 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.

Rights

© 2025 by the authors.

This article is an Open Access article distributed under the terms and conditions of the Creative Commons Attribution 4.0 International (CC BY 4.0) License.

Data Availability

Data availability statement: "No new data were created or analyzed in this study. Data sharing is not applicable to this article."

ORCID

0000-0002-7296-084X (Li)

Original Publication Citation

Oksoy, A. S., Farrell, M. R., & Li, S. (2025). A different risk–return relationship. Risks, 13(2), 1-27, Article 22. https://doi.org/10.3390/risks13020022

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