Net Present Value What Future Income Is Worth Today.html

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    <p>![[Naval-Ep50.mp3]]</p>
    <p>
      See what future income is worth today by applying a discount to its future
      value<strong>Nivi:</strong>
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    <p>
      Let’s talk about
      <a href="https://en.wikipedia.org/wiki/Net_present_value"
        >net present value</a
      >
      (NPV).
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      <strong>Naval:</strong> Net present value is when you say, “That stream of
      payments I’m going to get in the future—what’s it worth today?”
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      Here’s a common example: You’re joining a startup and getting stock
      options, and the founder says, “This company is going to be worth $1
      billion, and I’m giving you 0.1% of the company; therefore, you’re getting
      $1 million worth of stock.”
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      <strong
        >Figure out what future income is worth today by applying a discount
        rate</strong
      >
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    <p>
      The founder is negotiating based on what it’s going to be worth in the
      future. You have to figure out what it’s worth today by applying a
      discount rate, or an interest rate, that accounts for the massive risk
      startups face.
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      You’ll end up with the amount the company is actually worth today. That’s
      the price at which a venture capitalist would invest in the company.
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      If the founder recently raised a round at a $10 million valuation, then
      the company’s only worth 1% of what the founder says it will be worth. So
      your $1 million package is actually worth $10,000. You should get very
      comfortable doing rough net present value calculations in your head.
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