4 ms·

If the founders have the same class of shares as you, will this effect them equally?

by umanwizard 6y ago

itake 6y ago
Not if they just issue themselves more shares
- cj 6y ago
  > Not if they just issue themselves more shares This doesn't happen in the real world. When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired. New shares wouldn't go to the founders. Yes, it's hypothetically possible, but it doesn't happen in the real world.
  - konschubert 6y ago
    It happens regularly and it's called a re-up http://christophjanz.blogspot.com/2018/11/founders-please-dont-allow-anyone-to.html http://christophjanz.blogspot.com/2018/11/founders-please-do...
    - cj 6y ago
      The article is from 2018, and reads: > In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low. It would be not only bad for early employees, but also bad for early investors - it would hurt the founders reputation among their early investors (and employees) which most founders wouldn't be willing to do.
      - rutthenut 6y ago
        Your points about why this is bad are entirely correct. But founders with shareholding may (do) work with later investors to their joint benefit, screwing over other early shareholders or investors. With VC money holding shares already, that is not so likely to happen - unless it is the VC buying-in more equity. However, smaller enterprises with startup beginnings are very likely to follow this pattern, as later investors (and perhaps greedy founders) do not care about those that came before.
    - mizzao 6y ago
      Great article! I'd heard about this maneuver only in theory before and never saw it written up. Sounds like a bit of a moral hazard / principal agent problem for founders!
  - deleted 6y ago
    [deleted]
  - jariel 6y ago
    CJ it happens frequently enough that 'it's a thing' and it happens all the time. Usually in conjunction with a new round, but not always. The company will do a massive 'down round' - even lower than what they really want, bring on new investors. Then issue shares to current staff founders. That is de-facto like handing over equity from previous staff to new investors - you could almost do the math for how much 'old employees' stock was sold to new investors wherein said old employees didn't get a dime. It's generally going to happen in negative situations, but that happens a lot. Edit: and it's not something your ever going to hear about, it's obviously not something leadership wants anyone to know about. Even 'former employees' who were washed out may not find out - how would they? They're not entitled to be notified upon new issuance of shares.
    - s1artibartfast 6y ago
      At venture capital law firms, they have an endearing term for it. They call it a "cram down, pull through" deal. It is most common when potential investors have most of the leverage, but there are some holdout stakeholders which can also sink the round.
  - cedricd 6y ago
    I've seen it happen first hand. I had some stock in a company that was running out of money and having issues raising their next round. They ended up taking a deal with an investor that took a huge ownership stake and diluted the company significantly. To entice the founders not to bail they carved out some additional stock for them, but everyone else got hit by the full dilution. Ultimately it was the right call from the company survival perspective -- everyone who was severely diluted (including early investors) at least still have something worth more than $0.
wrnr 6y ago
They can negotiate for more shares for theme-selfs.

If the founders have the same class of shares as you, will this effect them equally?

itake 6y ago

Not if they just issue themselves more shares

cj 6y ago
> Not if they just issue themselves more shares This doesn't happen in the real world. When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired. New shares wouldn't go to the founders. Yes, it's hypothetically possible, but it doesn't happen in the real world.
- konschubert 6y ago
  It happens regularly and it's called a re-up http://christophjanz.blogspot.com/2018/11/founders-please-dont-allow-anyone-to.html http://christophjanz.blogspot.com/2018/11/founders-please-do...
  - cj 6y ago
    The article is from 2018, and reads: > In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low. It would be not only bad for early employees, but also bad for early investors - it would hurt the founders reputation among their early investors (and employees) which most founders wouldn't be willing to do.
    - rutthenut 6y ago
      Your points about why this is bad are entirely correct. But founders with shareholding may (do) work with later investors to their joint benefit, screwing over other early shareholders or investors. With VC money holding shares already, that is not so likely to happen - unless it is the VC buying-in more equity. However, smaller enterprises with startup beginnings are very likely to follow this pattern, as later investors (and perhaps greedy founders) do not care about those that came before.
  - mizzao 6y ago
    Great article! I'd heard about this maneuver only in theory before and never saw it written up. Sounds like a bit of a moral hazard / principal agent problem for founders!
- deleted 6y ago
  [deleted]
- jariel 6y ago
  CJ it happens frequently enough that 'it's a thing' and it happens all the time. Usually in conjunction with a new round, but not always. The company will do a massive 'down round' - even lower than what they really want, bring on new investors. Then issue shares to current staff founders. That is de-facto like handing over equity from previous staff to new investors - you could almost do the math for how much 'old employees' stock was sold to new investors wherein said old employees didn't get a dime. It's generally going to happen in negative situations, but that happens a lot. Edit: and it's not something your ever going to hear about, it's obviously not something leadership wants anyone to know about. Even 'former employees' who were washed out may not find out - how would they? They're not entitled to be notified upon new issuance of shares.
  - s1artibartfast 6y ago
    At venture capital law firms, they have an endearing term for it. They call it a "cram down, pull through" deal. It is most common when potential investors have most of the leverage, but there are some holdout stakeholders which can also sink the round.
- cedricd 6y ago
  I've seen it happen first hand. I had some stock in a company that was running out of money and having issues raising their next round. They ended up taking a deal with an investor that took a huge ownership stake and diluted the company significantly. To entice the founders not to bail they carved out some additional stock for them, but everyone else got hit by the full dilution. Ultimately it was the right call from the company survival perspective -- everyone who was severely diluted (including early investors) at least still have something worth more than $0.

wrnr 6y ago

They can negotiate for more shares for theme-selfs.