4 ms·

Employee Equity: Dilution

57 points by alexandros 16y ago

stevefink 16y ago
I'm assuming that questions about dilution hit Fred's radar after folks hit the theaters this weekend to see The Social Network. Although the actual numbers in the dramatic scene with Eduardo might be slightly exaggerated (I am not sure what happened in reality and how it got handled) - it's critical as a startup founder or startup employee to understand how dilution works because this can and will happen. It's natural. The one thing Fred did not mention is how some of the more aggressive investors out there will have contracts written that will limit the amount of dilution that can affect them when shares are redistributed - that was a new one I ran into with a recent startup of mine. Ultimately it's all about reading your contracts thoroughly and having not a good, but a GREAT lawyer who specializes in startups with you from the beginning.
- morisy 16y ago
  I had the same thoughts, though my co-founder and I had been looking for a clear explanation of this tricky topics for months before the movie. I'm glad it came out, pushed by popular culture or not. As for the factuality of the movie's dilution scene, as best I can tell the reduction in equity was somewhat less dramatic, but not that much. Instead of nearly a third of the company, Eduardo owned 7% according to several business blogs & Wikipedia (but no credible news sources, from which I can't find a citation about any number). This was reduced to less than a tenth of a percent, but later settled at about 5% (citation: http://bit.ly/aDms3t http://bit.ly/aDms3t) for what amounted to about 6 months of involvement.
oceanician 16y ago
I'm always suprised at the sums of money involved in salaries and equity in the states. Seem about 5x the pay of that in the UK. What USD cost of health insurance would you take off typically? (for a single person)
- mmt 16y ago
  For a small company making an effort to offer benefits comparable to a large company, such as through a PEO[1], the price tag will run $6k-$10k annually per employee, inclusive of payroll, compliance, and fixed employment taxes. A deferred compensation retirement plan (aka 401k) could run another $1k . Employer-side Social Security is 7.65% of salary. [1] Professional employment organization, aka "employee leasing"
  - tptacek 16y ago
    We offer these benfits and these numbers are in the ballpark without using a PEO (think "collective bargaining union of small companies").
    - mmt 16y ago
      Thanks for the different method of confirmation. I've found a PEO, itself, tends to cost $100-$500[1] monthly per empployee. How much (presumably in time, not dollars) does the collective bargaining cost you? [1] At 4 employees
mmt 16y ago
The title strikes me as a bit misleading, since, for all but the earliest employees, and, of course, founders, dilution's going to be in the noise.
- olegk 16y ago
  I know a del.icio.us employee (one of the first 10) who got completely ripped off on his equity.
  - pchristensen 16y ago
    joshu hangs around here but I doubt he can comment on it. Crunchbase says delicious was bought for ~$10M. Would an employee #10 ever have more than 1%? So we're talking max $100K before taking investors or acquirers into account. I'd be interested to hear more about what his being "completely ripped off" consisted of. Email me if you don't want to say in public.
heliodor 16y ago
you ideally take investments if you'll be better off afterward than before. relating to percent share, that means that while you get diluted in percentage terms, in dollar terms your cut goes up in value, so the percentage doesn't matter. on the other hand, the percentage determines control, so there's a balancing act involved.
auxbuss 16y ago
I created an alternative spreadsheet to pg's that is formula-based, which explains some of the final numbers. (At least that's the intention.) In particular, where the 3.7% adjustment for the pool refresh comes from. https://spreadsheets.google.com/ccc?key=0Ap9s-bcx0E1adGh4cVJEV3o5c3o4ckd4M3NrNXhxRkE&hl=en https://spreadsheets.google.com/ccc?key=0Ap9s-bcx0E1adGh4cVJ...
- auxbuss 16y ago
  I updated this spreadsheet so that the coloured fields can be manipulated to reflect your needs. You need to download it to do this, as if there is a way to allow this on GoogleDocs, I couldn't find it.
ghshephard 16y ago
Another Excellent article on this: http://baglady.dreamhosters.com/2007/11/16/california-dreamin-incentive-stock-options-and-the-silicon-valley-workerbee/ http://baglady.dreamhosters.com/2007/11/16/california-dreami... Preferred Share Liquidation Preference is another landmine. I know at least one (world class valley player) early epinions employee who walked away with almost nothing - The common shareholders got screwed when epinions merged with dealtime to form shopping.com - but he had already left the company for another gig, so there was really zero benefit to taking care of him. At Oblix, anybody who was an ex-employee ended up with zero on equity when they sold to Oracle for $85 Million - preferred shareholders ended up with everything. Existing employee who made it through the transition landed a retention bonus, and the founders (some of who were no longer at Oblix) picked up a "consulting" bonus to make sure the deal went through and they didn't block it. A few lessons learned from all these experiences: o At the end of the Day, you really are at the mercy of the Majority Shareholders, regardless of what equity you think you may have - unless you are prepared to go to war in court. o Always be aware of how much leverage you have with Founders Stock. When a final sale is going through, you may not have enough voting stock to defeat the deal, but you may have a large enough block to mount a legal challenge - it might be easier, and cheaper, and certainly less risky to simply buy you off. Protect your position. o Stay close and friendly to the CEO, VCs, and Board Members driving the financial structure (typically the ones selected by the VCs) They will be the ones who can re-up you when the dilutive rounds hit the company, or hand out "retention" bonuses after a sale - and they are the only ones who really have a clue as to what machinations are taking place. o Probably most importantly - bring unique value to the table that the company requires to succeed, and continue to succeed after a sale. I remember walking out of "The Social Network" wondering how on earth Eduardo manage to walk away with 7%. The way I watched the movie, Facebook succeeded despite his efforts to slam it with Ads too early, and his inability to pull in Angels like Thiel. And how he wasn't sitting right beside Mark night and day, is beyond me. And seriously, how could he claim to be the "CFO" and not be intimately familiar with each and every clause of the stock events that were taking place. It was liked he'd totally checked out and was just showing up now and then to see what was happening at the company. The movie was very unsympathetic to him. Now I have go read "The Facebook Effect" and "The accidental Billionaires"just to see if they portrayed Eduardo in a more sympathetic light. The movie portrayed Sean Parker as playing a much, much larger role in Facebook's success than Eduardo - yet they ended up with similar amounts of equity, which befuddles me.

57 points by alexandros 16y ago

I'm assuming that questions about dilution hit Fred's radar after folks hit the theaters this weekend to see The Social Network. Although the actual numbers in the dramatic scene with Eduardo might be slightly exaggerated (I am not sure what happened in reality and how it got handled) - it's critical as a startup founder or startup employee to understand how dilution works because this can and will happen. It's natural. The one thing Fred did not mention is how some of the more aggressive investors out there will have contracts written that will limit the amount of dilution that can affect them when shares are redistributed - that was a new one I ran into with a recent startup of mine. Ultimately it's all about reading your contracts thoroughly and having not a good, but a GREAT lawyer who specializes in startups with you from the beginning.

morisy 16y ago
I had the same thoughts, though my co-founder and I had been looking for a clear explanation of this tricky topics for months before the movie. I'm glad it came out, pushed by popular culture or not. As for the factuality of the movie's dilution scene, as best I can tell the reduction in equity was somewhat less dramatic, but not that much. Instead of nearly a third of the company, Eduardo owned 7% according to several business blogs & Wikipedia (but no credible news sources, from which I can't find a citation about any number). This was reduced to less than a tenth of a percent, but later settled at about 5% (citation: http://bit.ly/aDms3t http://bit.ly/aDms3t) for what amounted to about 6 months of involvement.

oceanician 16y ago

I'm always suprised at the sums of money involved in salaries and equity in the states. Seem about 5x the pay of that in the UK. What USD cost of health insurance would you take off typically? (for a single person)

mmt 16y ago
For a small company making an effort to offer benefits comparable to a large company, such as through a PEO[1], the price tag will run $6k-$10k annually per employee, inclusive of payroll, compliance, and fixed employment taxes. A deferred compensation retirement plan (aka 401k) could run another $1k . Employer-side Social Security is 7.65% of salary. [1] Professional employment organization, aka "employee leasing"
- tptacek 16y ago
  We offer these benfits and these numbers are in the ballpark without using a PEO (think "collective bargaining union of small companies").
  - mmt 16y ago
    Thanks for the different method of confirmation. I've found a PEO, itself, tends to cost $100-$500[1] monthly per empployee. How much (presumably in time, not dollars) does the collective bargaining cost you? [1] At 4 employees

mmt 16y ago

The title strikes me as a bit misleading, since, for all but the earliest employees, and, of course, founders, dilution's going to be in the noise.

olegk 16y ago
I know a del.icio.us employee (one of the first 10) who got completely ripped off on his equity.
- pchristensen 16y ago
  joshu hangs around here but I doubt he can comment on it. Crunchbase says delicious was bought for ~$10M. Would an employee #10 ever have more than 1%? So we're talking max $100K before taking investors or acquirers into account. I'd be interested to hear more about what his being "completely ripped off" consisted of. Email me if you don't want to say in public.

heliodor 16y ago

you ideally take investments if you'll be better off afterward than before. relating to percent share, that means that while you get diluted in percentage terms, in dollar terms your cut goes up in value, so the percentage doesn't matter. on the other hand, the percentage determines control, so there's a balancing act involved.

auxbuss 16y ago

I created an alternative spreadsheet to pg's that is formula-based, which explains some of the final numbers. (At least that's the intention.) In particular, where the 3.7% adjustment for the pool refresh comes from. https://spreadsheets.google.com/ccc?key=0Ap9s-bcx0E1adGh4cVJEV3o5c3o4ckd4M3NrNXhxRkE&hl=en https://spreadsheets.google.com/ccc?key=0Ap9s-bcx0E1adGh4cVJ...

auxbuss 16y ago
I updated this spreadsheet so that the coloured fields can be manipulated to reflect your needs. You need to download it to do this, as if there is a way to allow this on GoogleDocs, I couldn't find it.

ghshephard 16y ago

Another Excellent article on this: http://baglady.dreamhosters.com/2007/11/16/california-dreamin-incentive-stock-options-and-the-silicon-valley-workerbee/ http://baglady.dreamhosters.com/2007/11/16/california-dreami... Preferred Share Liquidation Preference is another landmine. I know at least one (world class valley player) early epinions employee who walked away with almost nothing - The common shareholders got screwed when epinions merged with dealtime to form shopping.com - but he had already left the company for another gig, so there was really zero benefit to taking care of him. At Oblix, anybody who was an ex-employee ended up with zero on equity when they sold to Oracle for $85 Million - preferred shareholders ended up with everything. Existing employee who made it through the transition landed a retention bonus, and the founders (some of who were no longer at Oblix) picked up a "consulting" bonus to make sure the deal went through and they didn't block it. A few lessons learned from all these experiences: o At the end of the Day, you really are at the mercy of the Majority Shareholders, regardless of what equity you think you may have - unless you are prepared to go to war in court. o Always be aware of how much leverage you have with Founders Stock. When a final sale is going through, you may not have enough voting stock to defeat the deal, but you may have a large enough block to mount a legal challenge - it might be easier, and cheaper, and certainly less risky to simply buy you off. Protect your position. o Stay close and friendly to the CEO, VCs, and Board Members driving the financial structure (typically the ones selected by the VCs) They will be the ones who can re-up you when the dilutive rounds hit the company, or hand out "retention" bonuses after a sale - and they are the only ones who really have a clue as to what machinations are taking place. o Probably most importantly - bring unique value to the table that the company requires to succeed, and continue to succeed after a sale. I remember walking out of "The Social Network" wondering how on earth Eduardo manage to walk away with 7%. The way I watched the movie, Facebook succeeded despite his efforts to slam it with Ads too early, and his inability to pull in Angels like Thiel. And how he wasn't sitting right beside Mark night and day, is beyond me. And seriously, how could he claim to be the "CFO" and not be intimately familiar with each and every clause of the stock events that were taking place. It was liked he'd totally checked out and was just showing up now and then to see what was happening at the company. The movie was very unsympathetic to him. Now I have go read "The Facebook Effect" and "The accidental Billionaires"just to see if they portrayed Eduardo in a more sympathetic light. The movie portrayed Sean Parker as playing a much, much larger role in Facebook's success than Eduardo - yet they ended up with similar amounts of equity, which befuddles me.