Repeated vs single stage games

As an investor, do you let a startup implement an employee option pool that dilutes you in order to retain and attract talent?

Do you forgo exercising an anti-dilution clause in a down round in order to lower the dilution suffered by the team?

Do you forgo part of your liquidation preference at the time of exit so that employees receive more of the exit proceeds?

Do you help a company closing shop pay off its liabilities even though you have no obligation to do so?

Do you let a founder who has worked hard on a business with a low salary for several years perform a small secondary sale to meet their personal needs?

Do you invite other investors to an attractive deal that you have the funds to do on your own?

In a single stage game, the optimal strategy is to not do any of these as they make you strictly worse off.

In a repeated game, however, your long-term outcome depends on your ability to play future games. You miss all the outcomes from the future games in which you don’t play. And to play the game, you need to be invited to the game.

So the optimal strategy in a repeated game often produces actions that are quite different than the optimal strategy in a single stage game.

The corollary to this is that our actions reveal whether we want to play a repeated game or a single stage game.

Also published on Medium.