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>It is also important to note that early employees experience more dilution events. An example of a dilution event would be raising another round of funding. Th

by jasode 8y ago

>It is also important to note that early employees experience more dilution events. An example of a dilution event would be raising another round of funding. This is another reason why joining a company early should offer more equity. I disagree that it's important to note that early employees experience more dilution events. I know you're trying to educate but this type of advice unintentionally misinforms people and causes people to pay attention to the wrong thing. Ultimately, the more important math is number_of_shares multiplied by share_price. As long as that goes up, dilution is not as important. What employees will care about is whether the total money wealth went up and not whether their 5% ownership turned into 4% because a new investment round bought 20% of the company. I have no idea why dilution attracts so much verbiage that's out of proportion to its mathematical importance.

PacifyFish 8y ago
I disagree. The most common way to predict payout is to compare to other companies' exit valuations. E.g. "Oh, company X got acquired for $250 million. We do something similar. If I own .025% of the company, I'd make $62,500 if we exited at that valuation. Cool." It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% if you're lucky enough to have a successful exit.
- doingmyting 8y ago
  I'm glad you said this. Many got burned including myself due to dilution events. When your 2% stake turns into 0.25% over time and you get paid last, there needs to be a very large buyout/IPO for you to get anything substantial. Add in the taxes paid on that and I would have been 10 times better working a corporate job with less headaches.
- jasode 8y ago
  >It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% But you're repeating the same error of prioritizing the wrong thing: dilution. What employees ultimately care about is their wealth calculation: shares_multiplied_by_price. Example of the type of math people actually care about: 0.008% (because dilutions) a $1 billion company is $80k 0.025% (no dilution) of a $100 million company is $25k. People would rather have $80k than $25k. The dilutions that dropped them from 0.025% to 0.008% is irrelevant trivia. For most employees that are minority shareholders, dilution is a side-effect calculation in the realm of academic trivia. Dilution is not a purposeful strategy in this situation. Highlighting "dilution" in advice for employees in an attempt to make them more financially more sophisticated has the opposite effect! The scenarios for dilution to be a calculated strategy would be something like a founder considering 2 different offers from potential investors. One VC offers $20 million for 15% of the company. Another offers $30 million for 25% of the company. Or some founders selling too much of a percentage such that the dilution crosses some boundary such as 51% ownership where they collectively lose control of the company. These deliberate decisions around dilution are very different from employees realistically worrying about dilution dropping them from 0.025% to 0.008%!
  - nlh 8y ago
    You’re entirely (technically) correct. The issue is that side-effect often comes into play because employees like to calculate potential future outcomes, and that’s done based only on overall company value (since that’s one of the only data points that’s available from past acquisitions). I’m sure you get this and I know the psychology of what an employee might hope for shouldn’t be relevant, but unfortunately it is. (For those who don’t fully get this - what I mean is that folks often look at a potential outcome and say “other companies like this have been acquired for $1-2B vs $100B, so if I’m being given 1% at $10M my stake could be worth $10M!” When in reality after dilution, that stake might only be worth $2M, which is a very different outcome after 5-10 years of hard work at below market salaries.)
    - tdumitrescu 8y ago
      Another aspect of this is that if you join an early stage startup and work there 5-10 years without any new equity grants (such as the annual refreshers that many companies give) while the company grows and does new funding rounds, then you're getting screwed badly.
      - jiveturkey 8y ago
        only financially, which isn't one of the reasons you should work for a startup!
        kakaorka 8y ago
        I think getting paid (preferably well) is always one of the reasons why people work for any company, including startups.
    - spookthesunset 8y ago
      What you are saying, I think, is it is important to figure out what the expected future value of each of your shares are. All you have to go on, in general, is "what do companies like this one generally sell for"? From that, assuming all the preferred stock get converted back to common stock, you can figure out what each unit of stock is worth. The problem is, the cap table you have now won't be the cap table you have when the company gets bought out. It's not dilution that is the problem. Dilution is just what happens when you bring in new money. It's that it is very hard to predict what a reasonable upper bound is for the future value of your shares. Quite frankly, it is one of the big reasons I think trading salary for stock options is a horrible idea. Much better to treat those options are lotto tickets--the odds they pay out in any meaningful life changing way are very small. Startups don't like to hear this because the truth is, when you work for a startup you almost always take a sizable hit to your salary.
- deleted 8y ago
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habitue 8y ago
It's not quite as straightforward as you're implying either. If you graph the total value of an employee's shares over time, dilution drops the value of that graph. You can say after the fact "look, after six months your total share value was higher than it started" but it doesn't change the fact that that graph has a big drop somewhere in it. If share price is constantly growing, dilution is always a bad thing for an employee. The pretense that they care about what percentage of the company is owned is specious. The real reason employees should put up with dilution is because the share price doesn't always grow. Sometimes, the company runs out of steam and it drops to zero. They should put up with dilution because it gives the company a better chance to end up profitable and for their shares to be worth anything at a liquidity event.
nirvdrum 8y ago
I think your overall point is fair -- you own less, but of a more valuable asset now, so you should come out ahead. However, in my experience the ones that say dilution doesn't matter are often the ones that are likely to be "made whole" at dilution events or have anti-dilution protections. If you're not experiencing dilution the same way that rank-and-file employees are, I think it's a bit disingenuous to tell them that it doesn't matter. As for its overall importance, most companies simply aren't going to be homeruns. I was at one company that passed on an acquisition offer of $X and opted to take an additional round of funding. A year later, the company sold for the same $X that it passed on. For sure, it was hoping to go much bigger than it ultimately did. But in addition to having to wait for all liquidation preferences to be settled, the employees all got to experience additional dilution for no additional gain. It's great to shoot for the stars and everyone joining a startup hope that's the outcome. But I don't think it's out of place to also think about the median case. An early stage employee takes a lot of risk with few protections.
SkyPuncher 8y ago
> I have no idea why dilution attracts so much verbiage that's out of proportion to its mathematical importance. Emotions. It's the same reason why many SMB owners get caught up in the 50/50 vs 49/51 split (when there are other, better ways of resolving the voting right aspect) or squabbling over a couple of percent in an investment deal. Logically, the differences are trivial, are likely to be diluted out anyways, and ultimately matter little compared to other factors. Emotionally, it feels huge. It "feels" like you're giving something up. On a pizza, "50%" is better than "10%" because it's clearly more of the pizza. Same with many tangible things in life.
- notfromhere 8y ago
  Because that split is the difference between control
convolvatron 8y ago
most companies dont ever reach billion dollar evaluations. say they get sold for a reasonable $100M after 4 years. my 1% stake as a founding engineer should gross me $1M (house money). but since there were 3 rounds I generally end up with car money. I've been through this several times, and ended up with car money or nothing, and I dont think I'm alone. a warning to fresh grads that they may not end up retiring after spending years of putting in time and a half seems in order.
- ryanmercer 8y ago
  > should gross me $1M (house money). That's more than my FIRE number haha, real estate in the Bay Area is so silly.
- wayne_skylar 8y ago
  This is a great point. I think that on average you're unlikely to recoup the difference in wages in the event that the company is sold. I worked for a startup for four years and got nothing.
  - balls187 8y ago
    This is far more likely scenario. To counter this perspective, usually founders take FAR less salary if at all.
- jartelt 8y ago
  But without those 3 rounds, your company likely wouldn't have gotten to the $100M valuation. Sure, if you can get a company to a $1B exit without raising any funding and avoiding any dilution, that is the best case. But, in reality most companies need to raise capital to grow. You accept dilution because the value of your shares should go up assuming the company is executing well and putting the capital to go use (i.e. increasing the company value). If the value of your stake goes down, you shouldn't just blame dilution. You should blame the company for performing poorly.
  - deleted 8y ago
    [deleted]
deleted 8y ago
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RcouF1uZ4gsC 8y ago
You are correct in theory. However, as the shares are not publicly traded share_price is very likely a bs number.
ummonk 8y ago
It's important to note dilution events because startups typically pitch their equity based on hypothetical future exit scenarios, without accounting for dilution.
foobiekr 8y ago
preference is, on the other hand, extremely important.

by jasode 8y ago

PacifyFish 8y ago

I disagree. The most common way to predict payout is to compare to other companies' exit valuations. E.g. "Oh, company X got acquired for $250 million. We do something similar. If I own .025% of the company, I'd make $62,500 if we exited at that valuation. Cool." It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% if you're lucky enough to have a successful exit.

doingmyting 8y ago
I'm glad you said this. Many got burned including myself due to dilution events. When your 2% stake turns into 0.25% over time and you get paid last, there needs to be a very large buyout/IPO for you to get anything substantial. Add in the taxes paid on that and I would have been 10 times better working a corporate job with less headaches.
jasode 8y ago
>It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% But you're repeating the same error of prioritizing the wrong thing: dilution. What employees ultimately care about is their wealth calculation: shares_multiplied_by_price. Example of the type of math people actually care about: 0.008% (because dilutions) a $1 billion company is $80k 0.025% (no dilution) of a $100 million company is $25k. People would rather have $80k than $25k. The dilutions that dropped them from 0.025% to 0.008% is irrelevant trivia. For most employees that are minority shareholders, dilution is a side-effect calculation in the realm of academic trivia. Dilution is not a purposeful strategy in this situation. Highlighting "dilution" in advice for employees in an attempt to make them more financially more sophisticated has the opposite effect! The scenarios for dilution to be a calculated strategy would be something like a founder considering 2 different offers from potential investors. One VC offers $20 million for 15% of the company. Another offers $30 million for 25% of the company. Or some founders selling too much of a percentage such that the dilution crosses some boundary such as 51% ownership where they collectively lose control of the company. These deliberate decisions around dilution are very different from employees realistically worrying about dilution dropping them from 0.025% to 0.008%!
- nlh 8y ago
  You’re entirely (technically) correct. The issue is that side-effect often comes into play because employees like to calculate potential future outcomes, and that’s done based only on overall company value (since that’s one of the only data points that’s available from past acquisitions). I’m sure you get this and I know the psychology of what an employee might hope for shouldn’t be relevant, but unfortunately it is. (For those who don’t fully get this - what I mean is that folks often look at a potential outcome and say “other companies like this have been acquired for $1-2B vs $100B, so if I’m being given 1% at $10M my stake could be worth $10M!” When in reality after dilution, that stake might only be worth $2M, which is a very different outcome after 5-10 years of hard work at below market salaries.)
  - tdumitrescu 8y ago
    Another aspect of this is that if you join an early stage startup and work there 5-10 years without any new equity grants (such as the annual refreshers that many companies give) while the company grows and does new funding rounds, then you're getting screwed badly.
    - jiveturkey 8y ago
      only financially, which isn't one of the reasons you should work for a startup!
      - kakaorka 8y ago
        I think getting paid (preferably well) is always one of the reasons why people work for any company, including startups.
  - spookthesunset 8y ago
    What you are saying, I think, is it is important to figure out what the expected future value of each of your shares are. All you have to go on, in general, is "what do companies like this one generally sell for"? From that, assuming all the preferred stock get converted back to common stock, you can figure out what each unit of stock is worth. The problem is, the cap table you have now won't be the cap table you have when the company gets bought out. It's not dilution that is the problem. Dilution is just what happens when you bring in new money. It's that it is very hard to predict what a reasonable upper bound is for the future value of your shares. Quite frankly, it is one of the big reasons I think trading salary for stock options is a horrible idea. Much better to treat those options are lotto tickets--the odds they pay out in any meaningful life changing way are very small. Startups don't like to hear this because the truth is, when you work for a startup you almost always take a sizable hit to your salary.
deleted 8y ago
[deleted]

habitue 8y ago

It's not quite as straightforward as you're implying either. If you graph the total value of an employee's shares over time, dilution drops the value of that graph. You can say after the fact "look, after six months your total share value was higher than it started" but it doesn't change the fact that that graph has a big drop somewhere in it. If share price is constantly growing, dilution is always a bad thing for an employee. The pretense that they care about what percentage of the company is owned is specious. The real reason employees should put up with dilution is because the share price doesn't always grow. Sometimes, the company runs out of steam and it drops to zero. They should put up with dilution because it gives the company a better chance to end up profitable and for their shares to be worth anything at a liquidity event.

nirvdrum 8y ago

I think your overall point is fair -- you own less, but of a more valuable asset now, so you should come out ahead. However, in my experience the ones that say dilution doesn't matter are often the ones that are likely to be "made whole" at dilution events or have anti-dilution protections. If you're not experiencing dilution the same way that rank-and-file employees are, I think it's a bit disingenuous to tell them that it doesn't matter. As for its overall importance, most companies simply aren't going to be homeruns. I was at one company that passed on an acquisition offer of $X and opted to take an additional round of funding. A year later, the company sold for the same $X that it passed on. For sure, it was hoping to go much bigger than it ultimately did. But in addition to having to wait for all liquidation preferences to be settled, the employees all got to experience additional dilution for no additional gain. It's great to shoot for the stars and everyone joining a startup hope that's the outcome. But I don't think it's out of place to also think about the median case. An early stage employee takes a lot of risk with few protections.

SkyPuncher 8y ago

> I have no idea why dilution attracts so much verbiage that's out of proportion to its mathematical importance. Emotions. It's the same reason why many SMB owners get caught up in the 50/50 vs 49/51 split (when there are other, better ways of resolving the voting right aspect) or squabbling over a couple of percent in an investment deal. Logically, the differences are trivial, are likely to be diluted out anyways, and ultimately matter little compared to other factors. Emotionally, it feels huge. It "feels" like you're giving something up. On a pizza, "50%" is better than "10%" because it's clearly more of the pizza. Same with many tangible things in life.

notfromhere 8y ago
Because that split is the difference between control

convolvatron 8y ago

most companies dont ever reach billion dollar evaluations. say they get sold for a reasonable $100M after 4 years. my 1% stake as a founding engineer should gross me $1M (house money). but since there were 3 rounds I generally end up with car money. I've been through this several times, and ended up with car money or nothing, and I dont think I'm alone. a warning to fresh grads that they may not end up retiring after spending years of putting in time and a half seems in order.

ryanmercer 8y ago
> should gross me $1M (house money). That's more than my FIRE number haha, real estate in the Bay Area is so silly.
wayne_skylar 8y ago
This is a great point. I think that on average you're unlikely to recoup the difference in wages in the event that the company is sold. I worked for a startup for four years and got nothing.
- balls187 8y ago
  This is far more likely scenario. To counter this perspective, usually founders take FAR less salary if at all.
jartelt 8y ago
But without those 3 rounds, your company likely wouldn't have gotten to the $100M valuation. Sure, if you can get a company to a $1B exit without raising any funding and avoiding any dilution, that is the best case. But, in reality most companies need to raise capital to grow. You accept dilution because the value of your shares should go up assuming the company is executing well and putting the capital to go use (i.e. increasing the company value). If the value of your stake goes down, you shouldn't just blame dilution. You should blame the company for performing poorly.
- deleted 8y ago
  [deleted]

deleted 8y ago

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RcouF1uZ4gsC 8y ago

You are correct in theory. However, as the shares are not publicly traded share_price is very likely a bs number.

ummonk 8y ago

It's important to note dilution events because startups typically pitch their equity based on hypothetical future exit scenarios, without accounting for dilution.

foobiekr 8y ago

preference is, on the other hand, extremely important.