Many new entrepreneurs are uncertain about the rules for engaging with venture capitalists. How does a deal benefit a startup? What are the essential calculations involved?

Paul Graham has done an in-depth analysis of this perennial teaser for new business owners.

If a venture capitalist offers you a certain sum of money in exchange for a shareholding in your startup, what are the rules governing these deals and how much of your business should you part with?

The answer apparently is : 1/(1 - n)

Whenever you’re trading stock in your company for anything … the test for whether to do it is the same. You should give up n percent of your company if what you trade it for improves your average outcome enough that the (100 - n) percent you have left is worth more than the whole company was before. For example, if an investor wants to buy half your company, how much does that investment have to improve your average outcome for you to break even? Obviously it has to double: if you trade half your company for something that more than doubles the company’s average outcome, you’re net ahead. You have half as big a share of something worth more than twice as much. In the general case, if n is the fraction of the company you’re giving up, the deal is a good one if it makes the company worth more than 1/(1 - n).

If you are in this scenario, you will have to go through a lot of hoops to get funding. It’s not a decision to take lightly. You will also lose much of your control of your business idea. Equally, a VC company will receive many business plans a year, some as many as 6000. They will probably fund around 20 of them.

The long-expected credit crunch linked to massive failure in the American sub-prime market really hit home yesterday.

The European Central Bank, regulator of the Eurozone group of countries, piled into the markets with $130 billion of cheap, emergency credit.

The move, the biggest central bank intervention since 9/11, came after reports that commercial lenders were desperately hauling back the supply of loans. The French giant BNP Paribas suspended withdrawals from three of its investment funds because of their exposure to the U.S. sub-prime market, saying “There has been a complete evaporation of liquidity” from credit markets, which could escalate into a worldwide credit squeeze.

Rumours were rife of impending fund meltdowns and banking collapses. Trevor Williams of Lloyds TSB said, “Liquidity has dried up basically. It’s a moment of panic.”

Nick Sparks, risk manager at F&C Partners, said, “People have got caught out. There will be more pain to come.”

You have been warned.

That may seem a silly question since most people would answer : “In the local shopping mall”. But, if you’re reading this, you would probably give a different reply. Here’s our U.S. finance correspondent to give his answer :

What should you do with your idle cash? Let’s say you’re responsible and you’ve accumulated an emergency fund. This is money that you can’t take risk with, but it would be nice to earn something on it, right? Depending on what you want, the world is full of options.

You can always leave it in a checking or savings account. Of course, you won’t earn much. Most brick and mortar banks are still paying almost nothing on deposits. However, the internet bank accounts make it more appealing. HSBC, INGDirect, and Capital One all have competitive rates these days – with no fees or minimum balance requirements. Whatever bank you use, make sure it’s FDIC insured.

You can also use money market funds. These are technically mutual funds that invest in short term issues. The advantage of a money market fund over a bank product is that the interest rate will likely change more rapidly (of course, that’s only an advantage if rates are going up and not down). The disadvantage of a money market is that there’s technically a possibility that you can lose your money if the underlying “money markets” fall apart. Read the fund’s prospectus to see what it invests in, and how you feel about that risk.

With a money market, you can sometimes get a checkbook to access your cash. They don’t like for you to write small checks, so they impose a minimum check size (like $500 per check). With a bank product, you usually link your account to a checking account and move money electronically when you’re ready to spend it. With either type of account, you can make deposits by check or electronically.

Which is better? It depends. Look them both over, compare rates, and figure out what suits your needs.

Scott Adams, who wrote the Dilbert books in the U.S., once concocted a 9-point plan for sorting out your money, which he called, The Unified Theory of Everything Financial.

Here it is adapted for the UK market :

1. Make sure you have a will.

2. Pay off all your credit cards.

3. If you have a family to support, get term life insurance.

4. Ensure you fund your company pension to the maximum.

5. Buy a house.

6. Put £3000 in a tax-free Isa savings account each year. (£3000 is the current maximum).

7. Any money left over, invest 70 percent in a stock index tracking fund, and 30 percent in a bond fund through any discount broker/fund supermarket. Don’t touch it until retirement.

8. For special cases, or lack of expertise, hire a fee-based financial planner, not one who charges a percentage of your portfolio.

Good advice, so pass it on to anyone you think may need it.