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This is bass ackwards. The founders get diluted more than anyone else. Every time you issue a new tranche of equity, the existing holders take dilution proporti
by theptip 9y ago
This is bass ackwards. The founders get diluted more than anyone else. Every time you issue a new tranche of equity, the existing holders take dilution proportional to the share they currently own.
If the original founders each hold 40%, and some employee holds 1%, after 50% dilution (common after the first couple rounds) the founders are down to 20% and the employee is down to 0.5%. It's possible to bump a star employee up by 0.5% to counter dilution. It is impossible to bump the founders up by 20% to get them back where they started.
The reason founders are OK with this is that they understand that 40% of a $1m company is worth less than 20% of a $10m company.
- eropple 9y agoThe founders get diluted more than anyone else. They also start with overwhelmingly more than anyone else. Pity the poor founder with their meager twenty percent--an employee at their pennies of equity is vanishingly unlikely, even at a successful company, to make back the opportunity cost of having their salaries gashed by going to a startup.
- Yizahi 9y agoAlso founders have shares. Employees get options with some crazy three letter types. They HAVE to pay in advance to get even those 0.0001% of shares after dilution. Not only that but they have to conjure that money in what, 3 month term, 1 month? I don't remember exactly.