4 ms·

What protects the stock from being diluted since presumably it has no or insufficient voting rights?

by nbevans 11y ago

diziet 11y ago
Nothing. Stock will get diluted. Typically every 'Series' fundraise will add 10-20% option pool and dilute the company by another 10-20% of preferred shares. The 'idea' is you have a smaller piece of a larger pie. Very incredible companies will raise at better terms and valuations and dilute more. This is very rare.
- nbevans 11y ago
  Indeed. In other, perhaps less "SV" companies, I've seen it happen where the CEO wants to bring in an associate as perhaps the COO, CTO, CFO or some other high level position. Obviously such a person won't just leave their "megacorp" job without some shares being offered to join the riskier venture. So they end up diluting the company just so that a certain % can be given to this new "super experienced and respected head". It is sold to the rest of the company that he will bring in new customers. What actually happens is almost nothing. No real value is created. Just expectations are created. This can be the same with "fund raising". Just because the company has diluted itself and now has a few million in the bank... it still has to spend that money wisely and correctly in order to realise a genuine "the pie is now bigger than before" that the shareholders were expecting.
- peter303 11y ago
  The Social Network movie shows some classic screwings in this case.
gibybo 11y ago
In theory, the company has a legal fiduciary duty to act in the best interest of the shareholders. If they try to rob the shareholders by unreasonably diluting, you could sue for breach of that responsibility. In practice, nothing really prevents it completely. However, the founders will generally be getting diluted the same amount as you so their interests are somewhat aligned with yours to negotiate a reasonable dilution amount. If they make some deal in which other shareholders get diluted much worse than themselves, it's often strong grounds for a legal suit.
- elmar 11y ago
  Real life extreme dilution example: How Mark Zuckerberg Booted His Co-Founder Out Of The Company http://www.businessinsider.com/how-mark-zuckerberg-booted-his-co-founder-out-of-the-company-2012-5 http://www.businessinsider.com/how-mark-zuckerberg-booted-hi... http://gawker.com/5643915/mark-zuckerberg-describes-the-dirty-tricks-that-led-to-the-facebook-movie http://gawker.com/5643915/mark-zuckerberg-describes-the-dirt...
UK-AL 11y ago
Dilution isn't so much a bad thing, as long the company value goes up enough to compensate.
inthewoods 11y ago
Nothing - and it leads you to an even more difficult place. Imagine a late stage startup that has raised, say, $40m. You leave and execute your shares. Now they do another raise, but the company situation has changed and the next round is a down round, or maybe it's an up round, but the money has a 2 or 3x liquidation preference on it. Ugly.

What protects the stock from being diluted since presumably it has no or insufficient voting rights?

by nbevans 11y ago

What protects the stock from being diluted since presumably it has no or insufficient voting rights?

Nothing. Stock will get diluted. Typically every 'Series' fundraise will add 10-20% option pool and dilute the company by another 10-20% of preferred shares. The 'idea' is you have a smaller piece of a larger pie. Very incredible companies will raise at better terms and valuations and dilute more. This is very rare.

nbevans 11y ago
Indeed. In other, perhaps less "SV" companies, I've seen it happen where the CEO wants to bring in an associate as perhaps the COO, CTO, CFO or some other high level position. Obviously such a person won't just leave their "megacorp" job without some shares being offered to join the riskier venture. So they end up diluting the company just so that a certain % can be given to this new "super experienced and respected head". It is sold to the rest of the company that he will bring in new customers. What actually happens is almost nothing. No real value is created. Just expectations are created. This can be the same with "fund raising". Just because the company has diluted itself and now has a few million in the bank... it still has to spend that money wisely and correctly in order to realise a genuine "the pie is now bigger than before" that the shareholders were expecting.
peter303 11y ago
The Social Network movie shows some classic screwings in this case.

gibybo 11y ago

In theory, the company has a legal fiduciary duty to act in the best interest of the shareholders. If they try to rob the shareholders by unreasonably diluting, you could sue for breach of that responsibility. In practice, nothing really prevents it completely. However, the founders will generally be getting diluted the same amount as you so their interests are somewhat aligned with yours to negotiate a reasonable dilution amount. If they make some deal in which other shareholders get diluted much worse than themselves, it's often strong grounds for a legal suit.

elmar 11y ago
Real life extreme dilution example: How Mark Zuckerberg Booted His Co-Founder Out Of The Company http://www.businessinsider.com/how-mark-zuckerberg-booted-his-co-founder-out-of-the-company-2012-5 http://www.businessinsider.com/how-mark-zuckerberg-booted-hi... http://gawker.com/5643915/mark-zuckerberg-describes-the-dirty-tricks-that-led-to-the-facebook-movie http://gawker.com/5643915/mark-zuckerberg-describes-the-dirt...

UK-AL 11y ago

Dilution isn't so much a bad thing, as long the company value goes up enough to compensate.

inthewoods 11y ago

Nothing - and it leads you to an even more difficult place. Imagine a late stage startup that has raised, say, $40m. You leave and execute your shares. Now they do another raise, but the company situation has changed and the next round is a down round, or maybe it's an up round, but the money has a 2 or 3x liquidation preference on it. Ugly.