3 ms·

but you cannot just dilute shares. Otherwise everybody would do that all the time. You buy 30% shares of a startup for 2 billion, then they just dilute you down

by erikb 9y ago

but you cannot just dilute shares. Otherwise everybody would do that all the time. You buy 30% shares of a startup for 2 billion, then they just dilute you down to 0.3%. That's not how it works. What they can do is either put him or themselves on a vesting schedule that represents share % with future work.

valuearb 9y ago
Oh but they can. If you start a company with two other founders and agree to a 1/3 split each, or 33,000 shares. After a month you get bored and decide to let them make it a success, quit the company and tell them to wire you your third when they finally succeed. In that case they can issue 1 million new shares immediately to themselves, and with very little tax consequence. It's a one month old startup, worth close to nothing so they can make them options costing a few pennies a share to make it fair and legal with no tax consequences . In the case where you leave with a sale or investment pending, it gets much trickier. The shares have to be priced at fair value. If the company is about to sell shares at $15 per share, new options for the remaining founders can likely to be priced somewhere around $1-$5 per share since they will be common shares, not preferred shares like the ones being sold. They can be fairly valued much cheaper because won't have the special rights of preferred shares, and should be less liquid.
- erikb 9y ago
  True. In that regard it's also fair.
  - kelnos 9y ago
    I think that's the crux of it: is it fair? If it's fair, you're in the clear. The diluted partner might be unhappy, and could even sue (but would hopefully lose), but at least objective observers with good information about what went down would be ok with it. If it's not fair, you open yourself up to lawsuits you may be unable to win, and your reputation as a fair dealer gets damaged, perhaps permanently, and people will think twice about working with you in the future.

by erikb 9y ago

valuearb 9y ago

Oh but they can. If you start a company with two other founders and agree to a 1/3 split each, or 33,000 shares. After a month you get bored and decide to let them make it a success, quit the company and tell them to wire you your third when they finally succeed. In that case they can issue 1 million new shares immediately to themselves, and with very little tax consequence. It's a one month old startup, worth close to nothing so they can make them options costing a few pennies a share to make it fair and legal with no tax consequences . In the case where you leave with a sale or investment pending, it gets much trickier. The shares have to be priced at fair value. If the company is about to sell shares at $15 per share, new options for the remaining founders can likely to be priced somewhere around $1-$5 per share since they will be common shares, not preferred shares like the ones being sold. They can be fairly valued much cheaper because won't have the special rights of preferred shares, and should be less liquid.

erikb 9y ago
True. In that regard it's also fair.
- kelnos 9y ago
  I think that's the crux of it: is it fair? If it's fair, you're in the clear. The diluted partner might be unhappy, and could even sue (but would hopefully lose), but at least objective observers with good information about what went down would be ok with it. If it's not fair, you open yourself up to lawsuits you may be unable to win, and your reputation as a fair dealer gets damaged, perhaps permanently, and people will think twice about working with you in the future.