9 ms·

I hear this argument a lot. Mostly from people trying to sell the idea of a highly dilutive funding round. Sure, further rounds are a sign the company is doin

by oillio 9y ago

I hear this argument a lot. Mostly from people trying to sell the idea of a highly dilutive funding round. Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does). If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the round just puts a number on what you already know. The math is simple. All things being equal, owning more % of a company == more money. To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.

icedchai 9y ago
Except, all things usually aren't equal. Most people explain dilution like this: you're getting a smaller piece of a bigger pie.
- mikepurvis 9y ago
  At the moment that the dilution occurs, you're getting exactly the same size of piece, it's just a smaller proportion of a bigger pie. But I suppose the idea is that a bigger pie is able to expand larger and faster than it would have been otherwise.
  - nathanstitt 9y ago
    Exactly! Thanks for pointing this out because everyone seems to miss it. At the moment that an investment is made, a company should be worth just as much as it was before, but will have more liquid assets because it's traded equity for cash. The question for employees and shareholders then becomes: "Do you believe management is capable of using the cash to build additional value, or will they waste it?"
  - wruza 9y ago
    If you're getting exactly the same size of piece, why name it "per cent"?
    - zalebz 9y ago
      you are getting the same amount of pie (your volume of food stays consistent) however the ratio of your piece vs the rest of the pie is what shrinks
  - bb88 9y ago
    I think this would be the case where language makes a clearer understanding. "You own 1% of the company" vs "You own 1% of the angel round stock pool." I think it's clear(er) what the second sentence means.
  - shaftway 9y ago
    I need you to ELI5 this for me. Let's say today I own 200 out of 10,000 shares (2%) of a company. Someone comes in and says we want to own 25% of your company and are willing to pay $100M for it. At that point (before any transactions happen) I assume that my company is worth ~$400M, and my shares are worth ~$8M ($400M * 0.02). So the majority shareholders agree to the deal and dilute stock accordingly. Now there are 13,333 shares. The new buyer get 3,333 (25%) and I still have my 200 (now 1.5%). The company is worth that original $400M value plus the new $100M that was invested, for a total of $500M. My shares are worth ~$7.5M ($500M * 0.015). Where did my half a million dollars of pie go?
    - AnimalMuppet 9y ago
      You structured the deal wrong. If the new people own 25% of the company, then the previous owners own 75%. That means that the new people should get one-third as many shares as previously existed (which you did correctly). But it also means that they should have to put up one-third as much money as the company was worth previously; that is, 133M, rather than the 100M you had them pay. Your loss is your cut of the 33M loss that your company took by getting underpaid.
    - mikepurvis 9y ago
      The $400M is a post-money valuation. The investor gave you a current valuation of $300M, and offered to add $100M for a post-money stake of 25%. Thus, 3333 new shares were created and sold to the investor for $100M. Your slice of pie before the deal is (200/10000) * $300M = 6M Your slice of pie after the deal is (200/13333) * $400M = 6M Except that after the deal, your company has $100M more to spend, hopefully on investing in growing the business so that later on, you'll own 1.5% of much more than $400M. This kind of thing is why management will sometimes try to steer employees away from discussions focused on percentages and toward ones focused on share prices. As an early employee who has been diluted a number of times, I certainly agree that it's more helpful to think in terms of my number of shares (which is unchanging) times a share price (announced at the time of the investment), rather than trying to compute my new percentage of the overall company value.
      - 9y ago
- Retric 9y ago
  It's zero net gain at the point of dilution. Owning 10% of 10 million or 1% of 100 million is the same money you simply have even less control. Unfortunately, rational people may have very different risk tolerances. Founders often see it as I have a company and X money to work with. The next round means I have a company and X + Y money to work with. In that context having a 90% chance of 10 million is often better than a 80% chance of 20 million even if the expected value drops the difference between 0 and 10 million is vastly larger than 10 million vs 20 million. But, smaller stakeholders may not agree with this thinking.
  - theptip 9y ago
    Right, but the only reason you'd take on any dilution as a founder is if you think the extra money will make your shares more valuable in the future.
    - Swizec 9y ago
      The issue is that as an employee you don't have that choice. Somebody else makes those decisions for you, you're just along for the ride.
      - sillysaurus3 9y ago
        The VC-backed company model isn't set up for employees. The model is so that (a) founders can take risks (b) using money from VCs (c) where if the company does well, the founders and VCs both become richer. Everything else follows from that. The fact that employees get any shares at all is just a way to get better employees so that the company does well. Only employees of unicorns have any chance of getting wealthy from stock, and you're unlikely to be an early employee of a unicorn. It's better to view the situation in absolute terms rather than relative terms. Instead of comparing the outcomes of founders/VCs vs employees, compare an employee of a startup to an employee of non-startups. At not-startups, the working environment is very different. Some people enjoy that, some prefer the opposite. Also, getting +$100k (or +$50k, or even just +$10k) is still nice, even if the founders and VCs get 800x more. The only part I have serious concerns about is the fact that you can end up underwater when it comes time to exercise your options, i.e. your tax bill outweighs whatever profits you'd see. I don't know exactly how this situation arises, but it happened to a friend. It was something like: he could have exercised his shares and gotten several hundred thousand, but he would've needed to pay about $100k in taxes beforehand. Since he didn't have that money, he couldn't exercise the options. I might be wrong about the specifics, but there are situations similar to that, and it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k.
dllthomas 9y ago
> [T]hey don't actually make the company more valuable (what the company does with the money they raise does). Yes they do. In two senses. The obvious one is probably not what you meant to refute - the total value of the company post raise is, in the simple case, the value of the company before the raise plus the value of the new cash. The company is more valuable. What I think you meant to say was that your shares don't get more valuable. That's more true, but they can be. If the raise was a good idea, the company's prospects are improved (and therefore the value of existing shares) by whatever uncertainty existed about its ability to raise that funding.
jasode 9y ago
>All things being equal, owning more % of a company == more money. The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company. If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%). >To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO. Dilution explanation doesn't require "spin" nor mental trickery. It is the natural side effect of how companies sell equity to grow. E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO[1]. If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company. So all things not being equal: 50% of $0 = $0 16% of $20 billion = ~$3 billion. Obviously $3 billion is more money than $0. Thinking that 50% is better than 16% doesn't make sense for companies that require outside investors to grow. Similar story for Bill Gates' dilution, Jeff Bezos' dilution, etc. Let's imagine Larry Page had a different conversation with Sequoia Capital to match this misunderstood fixation over "anti dilution" >1998: Larry owns 50% + Sergei owns 50% = 100% >1999: Sequoia: "we'd like to buy 10% of Google Inc for $12.5 million" >Larry responds: "Yes! Great! We need your $12.5 investment but keep in mind that both Sergei and I have anti-dilution clauses so our ownership both stays at 50%." > Sequoia responds, "So you want me to buy 0% of the company for $12.5 million? Uh, you guys are idiots" Somebody in that imaginary conversation doesn't understand "dilution" or "equity" or simple math. [1] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_economy/t/google-founders-sitting-billion-stakes/ http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...
- joncrocks 9y ago
  Sure, but dilution without representation can be a big risk for a regular employee. You might get a smaller slice of a bigger pie, but it may also represents a smaller real-world valuation if you get diluted too far. If you have no say over how much you're diluted (like most employees), you could be diluted away to nothing. You have no control. So you must calculate worth accordingly. Is everyone to get diluted equally. No? Well then, calculate worth accordingly. In addition, I thought the pie getting bigger was the WHOLE POINT OF HAVING THE SHARES TO BEGIN WITH.
robmay 9y ago
Isn't it amazing that every day, Apple offers new options, diluting everyone else who owns stock? Crazy anyone would work there, or want any Apple stock given that fact.

by oillio 9y ago

icedchai 9y ago

Except, all things usually aren't equal. Most people explain dilution like this: you're getting a smaller piece of a bigger pie.

mikepurvis 9y ago
At the moment that the dilution occurs, you're getting exactly the same size of piece, it's just a smaller proportion of a bigger pie. But I suppose the idea is that a bigger pie is able to expand larger and faster than it would have been otherwise.
- nathanstitt 9y ago
  Exactly! Thanks for pointing this out because everyone seems to miss it. At the moment that an investment is made, a company should be worth just as much as it was before, but will have more liquid assets because it's traded equity for cash. The question for employees and shareholders then becomes: "Do you believe management is capable of using the cash to build additional value, or will they waste it?"
- wruza 9y ago
  If you're getting exactly the same size of piece, why name it "per cent"?
  - zalebz 9y ago
    you are getting the same amount of pie (your volume of food stays consistent) however the ratio of your piece vs the rest of the pie is what shrinks
- bb88 9y ago
  I think this would be the case where language makes a clearer understanding. "You own 1% of the company" vs "You own 1% of the angel round stock pool." I think it's clear(er) what the second sentence means.
- shaftway 9y ago
  I need you to ELI5 this for me. Let's say today I own 200 out of 10,000 shares (2%) of a company. Someone comes in and says we want to own 25% of your company and are willing to pay $100M for it. At that point (before any transactions happen) I assume that my company is worth ~$400M, and my shares are worth ~$8M ($400M * 0.02). So the majority shareholders agree to the deal and dilute stock accordingly. Now there are 13,333 shares. The new buyer get 3,333 (25%) and I still have my 200 (now 1.5%). The company is worth that original $400M value plus the new $100M that was invested, for a total of $500M. My shares are worth ~$7.5M ($500M * 0.015). Where did my half a million dollars of pie go?
  - AnimalMuppet 9y ago
    You structured the deal wrong. If the new people own 25% of the company, then the previous owners own 75%. That means that the new people should get one-third as many shares as previously existed (which you did correctly). But it also means that they should have to put up one-third as much money as the company was worth previously; that is, 133M, rather than the 100M you had them pay. Your loss is your cut of the 33M loss that your company took by getting underpaid.
  - mikepurvis 9y ago
    The $400M is a post-money valuation. The investor gave you a current valuation of $300M, and offered to add $100M for a post-money stake of 25%. Thus, 3333 new shares were created and sold to the investor for $100M. Your slice of pie before the deal is (200/10000) * $300M = 6M Your slice of pie after the deal is (200/13333) * $400M = 6M Except that after the deal, your company has $100M more to spend, hopefully on investing in growing the business so that later on, you'll own 1.5% of much more than $400M. This kind of thing is why management will sometimes try to steer employees away from discussions focused on percentages and toward ones focused on share prices. As an early employee who has been diluted a number of times, I certainly agree that it's more helpful to think in terms of my number of shares (which is unchanging) times a share price (announced at the time of the investment), rather than trying to compute my new percentage of the overall company value.
    - 9y ago
Retric 9y ago
It's zero net gain at the point of dilution. Owning 10% of 10 million or 1% of 100 million is the same money you simply have even less control. Unfortunately, rational people may have very different risk tolerances. Founders often see it as I have a company and X money to work with. The next round means I have a company and X + Y money to work with. In that context having a 90% chance of 10 million is often better than a 80% chance of 20 million even if the expected value drops the difference between 0 and 10 million is vastly larger than 10 million vs 20 million. But, smaller stakeholders may not agree with this thinking.
- theptip 9y ago
  Right, but the only reason you'd take on any dilution as a founder is if you think the extra money will make your shares more valuable in the future.
  - Swizec 9y ago
    The issue is that as an employee you don't have that choice. Somebody else makes those decisions for you, you're just along for the ride.
    - sillysaurus3 9y ago
      The VC-backed company model isn't set up for employees. The model is so that (a) founders can take risks (b) using money from VCs (c) where if the company does well, the founders and VCs both become richer. Everything else follows from that. The fact that employees get any shares at all is just a way to get better employees so that the company does well. Only employees of unicorns have any chance of getting wealthy from stock, and you're unlikely to be an early employee of a unicorn. It's better to view the situation in absolute terms rather than relative terms. Instead of comparing the outcomes of founders/VCs vs employees, compare an employee of a startup to an employee of non-startups. At not-startups, the working environment is very different. Some people enjoy that, some prefer the opposite. Also, getting +$100k (or +$50k, or even just +$10k) is still nice, even if the founders and VCs get 800x more. The only part I have serious concerns about is the fact that you can end up underwater when it comes time to exercise your options, i.e. your tax bill outweighs whatever profits you'd see. I don't know exactly how this situation arises, but it happened to a friend. It was something like: he could have exercised his shares and gotten several hundred thousand, but he would've needed to pay about $100k in taxes beforehand. Since he didn't have that money, he couldn't exercise the options. I might be wrong about the specifics, but there are situations similar to that, and it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k.

dllthomas 9y ago

> [T]hey don't actually make the company more valuable (what the company does with the money they raise does). Yes they do. In two senses. The obvious one is probably not what you meant to refute - the total value of the company post raise is, in the simple case, the value of the company before the raise plus the value of the new cash. The company is more valuable. What I think you meant to say was that your shares don't get more valuable. That's more true, but they can be. If the raise was a good idea, the company's prospects are improved (and therefore the value of existing shares) by whatever uncertainty existed about its ability to raise that funding.

jasode 9y ago

>All things being equal, owning more % of a company == more money. The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company. If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%). >To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO. Dilution explanation doesn't require "spin" nor mental trickery. It is the natural side effect of how companies sell equity to grow. E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO[1]. If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company. So all things not being equal: 50% of $0 = $0 16% of $20 billion = ~$3 billion. Obviously $3 billion is more money than $0. Thinking that 50% is better than 16% doesn't make sense for companies that require outside investors to grow. Similar story for Bill Gates' dilution, Jeff Bezos' dilution, etc. Let's imagine Larry Page had a different conversation with Sequoia Capital to match this misunderstood fixation over "anti dilution" >1998: Larry owns 50% + Sergei owns 50% = 100% >1999: Sequoia: "we'd like to buy 10% of Google Inc for $12.5 million" >Larry responds: "Yes! Great! We need your $12.5 investment but keep in mind that both Sergei and I have anti-dilution clauses so our ownership both stays at 50%." > Sequoia responds, "So you want me to buy 0% of the company for $12.5 million? Uh, you guys are idiots" Somebody in that imaginary conversation doesn't understand "dilution" or "equity" or simple math. [1] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_economy/t/google-founders-sitting-billion-stakes/ http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...

joncrocks 9y ago
Sure, but dilution without representation can be a big risk for a regular employee. You might get a smaller slice of a bigger pie, but it may also represents a smaller real-world valuation if you get diluted too far. If you have no say over how much you're diluted (like most employees), you could be diluted away to nothing. You have no control. So you must calculate worth accordingly. Is everyone to get diluted equally. No? Well then, calculate worth accordingly. In addition, I thought the pie getting bigger was the WHOLE POINT OF HAVING THE SHARES TO BEGIN WITH.

robmay 9y ago

Isn't it amazing that every day, Apple offers new options, diluting everyone else who owns stock? Crazy anyone would work there, or want any Apple stock given that fact.