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Ask HN: What protects YC (or others) from dilution?
Suppose YC invests for 5% of a company. What prevents those founders from issuing 100x the number of shares and distributing it to themselves, and not investors? Are YC shares non-dilutable? If not, how do they allow for dilution but at the same time discourage founders from making certain investor's stakes worthless?
- websitescenes 14y agoYcombinator, invest in me and I will never do that to you.
- argonaut 14y agoNothing. No. They don't. Everyone gets diluted. VC firms and investors get diluted. There are ways to add anti-dilution clauses. It's complicated and I don't understand how they work. But AFAIK they are extremely rare and their presence will dissuade investors from investing. What prevents abuse? Trust. If you're a VC firm and you screw someone over, word will get around and all the good deals will dry up. If you're an entrepreneur and you screw someone over, word will get around and you'll never be able to raise money again (from the top firms, at least).
- yogKarma 14y agoI don't think YC ever asks for no-dilution. A founder can not cheat because of various reasons: 0. Founders will have to dilute themselves to dilute YC 1. Investment is done based on a contract, which defines and controls the power that founders have. They can't issue any number of shares to themselves without putting in more money. 2. If somehow, founders are able to cheat YC that would destroy their credibility and their market valuation, resulting in huge financial loss. EDIT: read this: http://www.paulgraham.com/angelinvesting.html http://www.paulgraham.com/angelinvesting.html