2 ms·
I'm not familiar with the shares details and rules governing it, but I've always wondered one thing. Maybe you could please explain to me - how come diluting sh
by Yizahi 4y ago
I'm not familiar with the shares details and rules governing it, but I've always wondered one thing. Maybe you could please explain to me - how come diluting shares during investment round is legal? Shouldn't all shares of a startup equate to 100% and then any investor just buy parts of that, from the founder's share? Like round A, HSBC buys 20% of the startup and owns 20% and founders(s) 80%. Then round B, JPM buys 25% of the startup on owns 25%, HSBC owns 20%, and founders own 55%. And so on.
With dilution it seems that new shares are spawned and every round and more, and so every original owner automatically looses parts of his share even without selling it? I understand that it is legal in the letter of the law. But isn't it basically a scam in the spirit of the law? Or am I missing something?
- fooster 4y agoOne is giving the founder money, the other is giving the company capital.
- ultrasaurus 4y agoShort answer: read the contracts, everything is being done legally. Slightly longer answer: Let's say you own 1% of a $80MM company that raises $20MM. Your shares were worth $800k before and they still are (0.8%100MM = 1.0%80). The hope/expectation is that money will allow the company to grow its valuation -- if they do, you shares become worth more. (What you could complain about is the CEO valuing the company too cheaply but there's a huge amount of luck and guesswork and you are missing so much information).