Paul Graham's equity equation: how does the math work out?
Regarding this excerpt from Paul Graham's essay The Equity Equation:
Let's run through an example. Suppose the company wants to make a "profit" of 50% on the new hire mentioned above. So subtract a third from 16.7% and we have 11.1% as his "retail" price. Suppose further that he's going to cost $60k a year in salary and overhead, x 1.5 = $90k total. If the company's valuation is $2 million, $90k is 4.5%. 11.1% - 4.5% = an offer of 6.6%.
How does 50% profit end up being 1/3 subtracted from 16.7%? In other words, how does 50% = 33%?
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After googling part of your question, I found you were referring to a Paul Graham essay. Next time please reference any relevant URL in your question -- the community will be better able to answer the question. – Patricia Wright 10 years ago
2 Answers
The concept profit is not used in the text with its strict meaning (that is, percentage_profit = 100x(price-cost)/price). What was really meant in the text was markup (percentage_markup = 100x(price-cost)/cost.
If you do the algebra, you'll notice that a percentage markup of a 50% is always exactly a 33% of percentage profit.
Since I doubt Paul Graham doesn't know the difference between a percentage markup and a percentage profit, I believe that he just picked the term that he thought was more mainstream for his audience to try to make his point.
Profit + Cost = 150% means Profit is 1/3 of the total 150%...
