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>I don't really understand why dilution is such a common thing. It's because the dilution mechanism is the easiest way to sell partial ownership without tax p

by jasode 8y ago

>I don't really understand why dilution is such a common thing. It's because the dilution mechanism is the easiest way to sell partial ownership without tax penalties and it also a minimizes the # of transactions among previous owners. Reducing everybody's ownership by a percentage amount ("dilution") is way more straightforward than having all owners coordinate to sell a fraction of their shares to an investor. >, I think it would be much more fair to sell my own shares to investors, instead of diluting all of my early employees. [...] , then just give them 0.3% and promise that there will be no dilution. Let's say an investor wants to invest $1 million. If you sell your shares, it will be a taxable event. You'll pay ~$350k in taxes to the government and keep $650k. On the other hand, if you dilute everybody, that $350k can be used by the company to pay salaries for 2 more programmers for another year. To simplify all this, what you, as a founder, really want to achieve when looking out for the welfare of employees is to increase their total wealth. Dilution isn't the real issue; instead, it's ultimately increasing their total wealth by making the company more valuable. (If you want to somewhat approximate the idea that "0.3% that never dilutes", the company could issue extra refresh grants to that employee. But mathematically, that still requires diluting somebody else because all owners still have to add up to 100%.) >EDIT: I just got to the end of the article: "Finally, we structured our company in such a way that our tokens never dilute." That sounds like a great idea to me. It's only a great idea of future investors buy into it. If Near's previous tokens "never dilute", then the author doesn't make it clear what the future investors are buying. The investors can't be buying equity since they just said existing tokens don't dilute. So are new investors providing a loan? Or buying bonds? Or buying warrants? Or if they're buying "utility tokens" instead of "ownership tokens", how do their investors make a multiple of their investment back?

nathan_f77 8y ago
> Let's say an investor wants to invest $1 million. If you sell your shares, it will be a taxable event. You'll pay ~$350k in taxes to the government and keep $650k. On the other hand, if you dilute everybody, that $350k can be used by the company to pay salaries for 2 more programmers for another year. I'm a solo founder who owns 100% of the company, and I forgot how Stripe Atlas set it up for me. My company has a total of 10 million shares, and I purchased 8 million shares at the beginning, and left 2 million shares in the option pool for employees. So if I wanted to raise money, I'd need to issue more shares, instead of selling some of my own (which would be personal income.) I'm not 100% sure how it works, but I still own those 2 million shares, even if I didn't purchase them. So I don't really know why I purchased 8 million shares, instead of 1 million, or even just 100 shares. Then if someone wanted to invest $1M, the company could just give them some of the ~unissued~ authorized shares. So I wouldn't need to sell any of my own shares or issue new ones. Is there any reason why that wouldn't work? EDIT: Ohhhhhhhh that's exactly how it works already. I got confused between authorized and issued shares. This quora answer helped me understand it: https://qr.ae/TUfj33 https://qr.ae/TUfj33 Also this Stripe Atlas guide: https://stripe.com/atlas/guides/equity#why-dont-companies-immediately-issue-all-authorized-shares https://stripe.com/atlas/guides/equity#why-dont-companies-im... I think it's still a bit annoying that Stripe Atlas only authorized 10 million shares for me, and I already issued 8 million to myself. It sounds like I will have to do some legal work to authorize additional shares for investors in the future.
- ABCLAW 8y ago
  >I think it's still a bit annoying that Stripe Atlas only authorized 10 million shares for me, and I already issued 8 million to myself. It sounds like I will have to do some legal work to authorize additional shares for investors in the future. The 'some legal work' in question is trivial if you're the sole owner and stakeholder, so don't be too concerned. :)

by jasode 8y ago

nathan_f77 8y ago

> Let's say an investor wants to invest $1 million. If you sell your shares, it will be a taxable event. You'll pay ~$350k in taxes to the government and keep $650k. On the other hand, if you dilute everybody, that $350k can be used by the company to pay salaries for 2 more programmers for another year. I'm a solo founder who owns 100% of the company, and I forgot how Stripe Atlas set it up for me. My company has a total of 10 million shares, and I purchased 8 million shares at the beginning, and left 2 million shares in the option pool for employees. So if I wanted to raise money, I'd need to issue more shares, instead of selling some of my own (which would be personal income.) I'm not 100% sure how it works, but I still own those 2 million shares, even if I didn't purchase them. So I don't really know why I purchased 8 million shares, instead of 1 million, or even just 100 shares. Then if someone wanted to invest $1M, the company could just give them some of the ~unissued~ authorized shares. So I wouldn't need to sell any of my own shares or issue new ones. Is there any reason why that wouldn't work? EDIT: Ohhhhhhhh that's exactly how it works already. I got confused between authorized and issued shares. This quora answer helped me understand it: https://qr.ae/TUfj33 https://qr.ae/TUfj33 Also this Stripe Atlas guide: https://stripe.com/atlas/guides/equity#why-dont-companies-immediately-issue-all-authorized-shares https://stripe.com/atlas/guides/equity#why-dont-companies-im... I think it's still a bit annoying that Stripe Atlas only authorized 10 million shares for me, and I already issued 8 million to myself. It sounds like I will have to do some legal work to authorize additional shares for investors in the future.

ABCLAW 8y ago
>I think it's still a bit annoying that Stripe Atlas only authorized 10 million shares for me, and I already issued 8 million to myself. It sounds like I will have to do some legal work to authorize additional shares for investors in the future. The 'some legal work' in question is trivial if you're the sole owner and stakeholder, so don't be too concerned. :)