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Uh, honestly, getting diluted at all sounds like utter bullshit. Imagine being told "you will get 100,000 dollars at the end of the year," and then halfway thro

Uh, honestly, getting diluted at all sounds like utter bullshit. Imagine being told "you will get 100,000 dollars at the end of the year," and then halfway through the year you're told "okay, now it will be 50,000 dollars instead." What's your recourse there? How is it not a ripoff? Am I misunderstanding a crucial aspect of the system?

vl 17y ago
Diluting is balanced by desire of the shareholders to keep larger portion of the company and need for the fresh funds. I.e. seed investors + founders + pre-seed employees (+ISO pool) share all the stock between themselves. Now they are all in the same boat: additional stock is going to be issued for Series A investment and if investment is too large, all of them get diluted too match, if it's not enough, company dies. If you are employee, you can't do much about it, but founders and angels are going to look after their own interest and protect you as well. In this sense the most important number for pre-seed employee is the ratio of his stock to the founders stock. It's possible to issue additional stock and just grant it to some parties to dilute other party, it's quite hard to do because if diluted party is dissatisfied (and it usually is), it exposes company to litigation.
gyardley 17y ago
Yes, your analogy is faulty. First, what you're given is a number of shares, not a fixed percentage of the company - if you're given 100,000 options at the start of the year, you still have 100,000 options at the end of the year. Second, the dilution that occurs through the issuing of shares to investors should make the company more valuable, not less - because the company takes that money and grows with it. Your shares are a smaller percentage of the overall company but end up worth more in absolute dollar terms. (If that's not the case, the company is wasting other people's money - the value of your shares goes down, but this is deserved.) In other words, if you go from a 1% stake to a 0.1% stake through dilution and then get $20K of a $20M sale, you haven't been ripped off, you just overestimated the company's ability to turn your initial 1% stake into something meaningful.
portman 17y ago
Here's a simple case. Company is worth $1MM. You own 10% of the company. Company gets a $1MM cash investment. You get diluted to 5%. But the company is now instantly worth $2MM. 10% of $1MM = 5% of $2MM This is not bullshit, it's math.

vl 17y ago

Diluting is balanced by desire of the shareholders to keep larger portion of the company and need for the fresh funds. I.e. seed investors + founders + pre-seed employees (+ISO pool) share all the stock between themselves. Now they are all in the same boat: additional stock is going to be issued for Series A investment and if investment is too large, all of them get diluted too match, if it's not enough, company dies. If you are employee, you can't do much about it, but founders and angels are going to look after their own interest and protect you as well. In this sense the most important number for pre-seed employee is the ratio of his stock to the founders stock. It's possible to issue additional stock and just grant it to some parties to dilute other party, it's quite hard to do because if diluted party is dissatisfied (and it usually is), it exposes company to litigation.

gyardley 17y ago

Yes, your analogy is faulty. First, what you're given is a number of shares, not a fixed percentage of the company - if you're given 100,000 options at the start of the year, you still have 100,000 options at the end of the year. Second, the dilution that occurs through the issuing of shares to investors should make the company more valuable, not less - because the company takes that money and grows with it. Your shares are a smaller percentage of the overall company but end up worth more in absolute dollar terms. (If that's not the case, the company is wasting other people's money - the value of your shares goes down, but this is deserved.) In other words, if you go from a 1% stake to a 0.1% stake through dilution and then get $20K of a $20M sale, you haven't been ripped off, you just overestimated the company's ability to turn your initial 1% stake into something meaningful.

portman 17y ago

Here's a simple case. Company is worth $1MM. You own 10% of the company. Company gets a $1MM cash investment. You get diluted to 5%. But the company is now instantly worth $2MM. 10% of $1MM = 5% of $2MM This is not bullshit, it's math.