Comment by cperciva

IF the expected utility varies linearly with the number of shares (and thus the expected amount of money received in the end), you're absolutely right. But does it?

For large investment or VC funds, the utility-of-money function associated with any particular investment is almost linear. There's a very good reason for this: As far as Sequoia is concerned, a dollar earned from their Google stock is pretty much equivalent to a dollar earned from their Loopt stock. Not quite equivalent, since there are non-tangible advantages for a VC fund to have many smaller success stories instead of one Google; but close.

As you point out in http://www.paulgraham.com/vcsqueeze.html, founders aren't "rational" in the sense of having the same approximately linear utility-of-money function as VCs: "... letting the founders sell a little stock early would generally be better for the company, because it would cause the founders' attitudes toward risk to be aligned with the VCs'. As things currently work, their attitudes toward risk tend to be diametrically opposed: the founders, who have nothing, would prefer a 100% chance of $1 million to a 20% chance of $10 million, while the VCs can afford to be "rational" and prefer the latter."

There's another reason to think that most people have concave utility-of-money curves: The insurance industry. If you buy house insurance, you are lowering your expected number of dollars (because even ignoring market friction, the insurance companies have to make a profit), but raising your expected utility.