3 ms·

Related because it’s such a common refrain: Is it possible, as a founding engineer or similar, to structure the contract in such a way as to make your shares un

Related because it’s such a common refrain: Is it possible, as a founding engineer or similar, to structure the contract in such a way as to make your shares undilutable? I suspect the answer is theoretically yes, but would be interested in how it works out in practice.

jacquesm 5y ago
You usually have the option to buy newly issued shares pro-rata and at the same valuation as the other buyers, but I've never seen shares that can not be diluted (essentially that would mean automatically issuing and assigning shares to one or more shareholders without the issuing funds being paid and afaik no notary public will sign off on that, shares need to be paid into the proper vehicle).
rsstack 5y ago
Anything other than pro-rata with MFN will have a tax liability for you. If the company was valued at $1M when you joined and you got 1% (simple numbers), and then the company raises $2M at a $10M pre-money valuation, your share goes down to 1%*(10/12)=0.83%. To keep you from dilution without you buying new stock, then company would "gift" you new shares, about 0.17% (a bit less but it doesn't matter). You'd then have to pay regular income tax on those $20k worth of stocks, likely at the highest tax bracket. It gets worse with higher valuations, and if it's your first startup you'll likely go bankrupt from the taxes before you get to a liquidation event. (Having pro-rata rights doesn't make this cheaper: you'd need to pay the company the whole $20k to exercise your rights. My goal was to demonstrate that there isn't a way to get no dilution for free.)
- akvadrako 5y ago
  If your shares are going up so much that taxes on it are hard to pay, obviously your base salery should be higher. If not, because you are just coasting, you should be selling shares to make up for it.
  - rsstack 5y ago
    The real error in my comment is that the company could give an ESOP refresh for the missing percentage.
janstice 5y ago
I suspect that anyone offering such an agreement in a potentially venture funded startup would be so hopelessly naive that it would be a huge red flag for further issues down the track (partnership or co-op model might be a different story, but probably not).

jacquesm 5y ago

You usually have the option to buy newly issued shares pro-rata and at the same valuation as the other buyers, but I've never seen shares that can not be diluted (essentially that would mean automatically issuing and assigning shares to one or more shareholders without the issuing funds being paid and afaik no notary public will sign off on that, shares need to be paid into the proper vehicle).

rsstack 5y ago

Anything other than pro-rata with MFN will have a tax liability for you. If the company was valued at $1M when you joined and you got 1% (simple numbers), and then the company raises $2M at a $10M pre-money valuation, your share goes down to 1%*(10/12)=0.83%. To keep you from dilution without you buying new stock, then company would "gift" you new shares, about 0.17% (a bit less but it doesn't matter). You'd then have to pay regular income tax on those $20k worth of stocks, likely at the highest tax bracket. It gets worse with higher valuations, and if it's your first startup you'll likely go bankrupt from the taxes before you get to a liquidation event. (Having pro-rata rights doesn't make this cheaper: you'd need to pay the company the whole $20k to exercise your rights. My goal was to demonstrate that there isn't a way to get no dilution for free.)

akvadrako 5y ago
If your shares are going up so much that taxes on it are hard to pay, obviously your base salery should be higher. If not, because you are just coasting, you should be selling shares to make up for it.
- rsstack 5y ago
  The real error in my comment is that the company could give an ESOP refresh for the missing percentage.

janstice 5y ago

I suspect that anyone offering such an agreement in a potentially venture funded startup would be so hopelessly naive that it would be a huge red flag for further issues down the track (partnership or co-op model might be a different story, but probably not).