261–270 of 325 posts
Earlier quoted context omitted.
Right, but the only reason you'd take on any dilution as a founder is if you think the extra money will make your shares more valuable in the future.
The issue is that as an employee you don't have that choice. Somebody else makes those decisions for you, you're just along for the ride.
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I hear this argument a lot. Mostly from people trying to sell the idea of a highly dilutive funding round. Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does). If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the rou…
>All things being equal, owning more % of a company == more money. The point is all things are not equal . To restate a sibling comment, dilution means you own a smaller % of a more valuable company. If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%). >To try to spin…
> The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company.
Right but if you aquired your shares under the assumption that you would own the same percent of a more valuable company, you are still being taken advantage of.
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I'd prefer plain old stock without restrictions and a larger proportion of it. I think we ought to target a controlling interest for the employees (i.e. employees own over 51% of the company) and shareholders vote on the weight of their shares, like they normally do. In sum, I'd rather see a founder worth $100 Million and 999 employees worth $900k than a $800 Millionaire and 999 employees worth $200k. And I actually…
As somebody who's founded a couple companies, there just aren't enough people with the appetite for risk and drive needed to manage a controlling interest in a company. And on an economic level, if the net compensation level, including crushing levels of stress and overwork , was so bad between founders and employees, you'd see a lot more founders until the system balanced itself out. And you do not. Most real good e…
To answer another response on this thread about taxes, if it were in fact market value, I'd sell the shares like any other share and pay the taxes owed.
Note: I know there are issues surrounding the number of private owners a company is permitted and other regulations. I'd simply invite a corporate lawyer to take a stab at it. Maybe a large holding corporation that would be public and issue shares to you related to your stake in startup sub corp(s) (akin to paychex, trinet, etc...)
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It's zero net gain at the point of dilution. Owning 10% of 10 million or 1% of 100 million is the same money you simply have even less control. Unfortunately, rational people may have very different risk tolerances. Founders often see it as I have a company and X money to work with. The next round means I have a company and X + Y money to work with. In that context having a 90% chance of 10 million is often better th…
Yet you just lost 90% of your money. It's shocking that you can now see the trick being performed on employees. What a typical employee thought: - I have 1% of a 10M dollar company. We'll do well and in 2 years I will have 1% of a 100M dollar company. What will happen in the best case: - I had 1% of a 10M dollar company. They did well and now he has 1% of a 100M company (dilution in your face!). He just lost 9M. They…
You've meant to say "They did well and now he has 0.1% of a 100M company" I assume? Otherwise numbers don't add up. If all goes well the value of a smaller percentage after dilution should be higher than before the dilution, for example: 1% of 10M ($100k) -> 0.2% of 100M ($200k).
Earlier quoted context omitted.
>All things being equal, owning more % of a company == more money. The point is all things are not equal . To restate a sibling comment, dilution means you own a smaller % of a more valuable company. If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%). >To try to spin…
I didn't say anything about anti-dilution. There are complexities, but as you explain, if you take more money, you need to give the investors something. If you look purely at the accounting, and ignoring voting rights and other complications, you are right. Dilution doesn't change anything. IMHO this argument is a case of technically accurate, and completely useless. It doesn't matter what the value of the company is…
Actually, your statement of "All things being equal, owning more % of a company == more money." ... is what's misleading.
People are cargo-culting the meme that "dilution is bad" and it has the perverse effect of making them think that awareness of it is "financial sophistication."
Your other statement, "Mostly from people trying to sell the idea of a highly dilutive funding round." ... is also misleading.
It's not the "dilutive" effect that's the core issue. It's whether the company needs the funds. If the company needs the investment, it needs the investment. The dilution is a side effect.
If the new investors want too high of a percentage-of-ownership, then yes, it's "highly dilutive" which is tautology. This may also appear like a dilution problem but it's not. It's a financial literacy problem. The founders are supposed be smart and not sell too much of the company for too little a price! Therefore, I'm not talking about desperate situations of founders getting diluted down to 10% or less which then affects their motivation to run the company. In that case, the company is probably in financial trouble and the other option is to reject the investment which lets employees maintain a non-dilutive ownership of a bankrupt company.
>The new round could be very good, but not necessarily. There is no guarantee [...]
I agree but the backlash against dilution is about expectation of future events whereas your scenario is ex post facto judgement of past outcomes.
For a startup operating in the present moment, do the employees want the company to be able to raise equity financing to help navigate an unknowable future?!? If yes, it means everybody should expect some dilution in exchange for the outside investment.
>Lets look at two options: Option 1 [...] Option 2
Again, for both of your options, the easier and correct focus is shares multiplied by price. In the bad outcome of Option 1, the price went down. In the good outcome of Option 2, the price went up.
Focusing on dilution as some scary boogeyman is backwards since everybody else gets diluted (see Larry Page, Bill Gates, Mark Zuckerberg, etc)
Again, to reiterate the Larry Page example:
- Focus on the $3 billion vs $0. This is shares * price. The price is embedded in the "all other things being equal" part that you dismissed. The price is "not equal"!
- Don't focus on the dilution from 50% vs 16%. You can't play a mental game of "if Larry got 50% of $20 billion, that's $10 billion not $3 billion" because for him to keep 50% (dilution is bad), you have to replay history with him attempting to build Google with zero outside investment. It's more likely he'd have a bankrupt company instead of a $20B company since he can only buy a handful of servers by maxing out his credit-cards, and have no money to hire extra employees. This is the literal application of your "all things being equal". That's flawed ex post facto analysis which doesn't take into account the timeline and reasons people choose to dilute ownership / sell equity to capitalize the company at different stages.
If dilution is bad for the employee, then it is also bad for everyone else. If as you say, "the new round may not be good for the employee", then it also means it's not good for the founders and previous VCs. If the founders are not crooks, the intention for the investment round to help make the company better, not worse.
I still think the main source of outrage about dilution is that people think only the employees get diluted. They don't realize that every owner of the company including founders like Larry Page and VCs like Sequoia will get diluted too. All the sentiments of unfairness flow from that fundamental misunderstanding.
Earlier quoted context omitted.
The issue is that as an employee you don't have that choice. Somebody else makes those decisions for you, you're just along for the ride.
Which should have been clear to you when you joined the company and read and signed the employment and stock options agreements (you did read them, didn't you?). If that isn't to your liking, don't work for a startup.
Earlier quoted context omitted.
It's zero net gain at the point of dilution. Owning 10% of 10 million or 1% of 100 million is the same money you simply have even less control. Unfortunately, rational people may have very different risk tolerances. Founders often see it as I have a company and X money to work with. The next round means I have a company and X + Y money to work with. In that context having a 90% chance of 10 million is often better th…
Yet you just lost 90% of your money. It's shocking that you can now see the trick being performed on employees. What a typical employee thought: - I have 1% of a 10M dollar company. We'll do well and in 2 years I will have 1% of a 100M dollar company. What will happen in the best case: - I had 1% of a 10M dollar company. They did well and now he has 1% of a 100M company (dilution in your face!). He just lost 9M. They…
Earlier quoted context omitted.
>All things being equal, owning more % of a company == more money. The point is all things are not equal . To restate a sibling comment, dilution means you own a smaller % of a more valuable company. If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%). >To try to spin…
I didn't say anything about anti-dilution. There are complexities, but as you explain, if you take more money, you need to give the investors something. If you look purely at the accounting, and ignoring voting rights and other complications, you are right. Dilution doesn't change anything. IMHO this argument is a case of technically accurate, and completely useless. It doesn't matter what the value of the company is…
>The new round may not be good for the employee. When you look forward to the eventual liquidity event, the employee now has a smaller piece of the same sized pie. Maybe the company could still reach its goal by tightening its belt a bit.
Sure, but not taking the extra round is also bad for the employee, right? If you don't take the round, and the company now looks like a $50M company, then you have the same piece, of a much smaller pie.
Everyone should look at http://equidateinc.com I think it is the direction of the future.
Options are a complex topic, this article gets a lot wrong. 1. The base offer. Many startups pay competitive or close to competitive salaries + equity. 2. The value of the options depends on your ability to pick the right startup and you believe that you can make a difference to the company. I have a friend who picked the right startup 4 times in a row. 3. Stock options are typically priced at 25% of the last round.…
2. If you're that good at picking startups, become a VC.
3. Common shares are priced less than preferred because they're worth less than preferred.
4. Startups at every stage give liquidation preferences. Startups under pressure will give more significant preferences, sure, but they're relevant to basically every startup.