How equity dilution works

Gaebler Ventures have a simple explanation here of how dilution works which is highly relevant for startups.

However, the two elements that are omitted are
a) provision can be included such that the equity allocated is maintained. Hence, in the example, the VC could be allocated a percentage of the shares not owned by the COO

b) if the COO is a key executive who will be a key factor in the creation of value, most VCs would want to ensure that they are appropriately incentivised and remunerated for their efforts. If they become disillusioned or demotivated, the VC's investment will be affected.

Sadly, they don't allow comments on their site (so Web 1.0) otherwise I would have posted these comments on their directly.

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posted by John Wilson @ 9:49 PM Permanent Link newsvine reddit



2 Comments:

At 3:15 AM, Anonymous Anonymous said...

Hi John
Could you please expand on a)? Is that a common approach for keeping the employee's ownership stake whole? I currently hold a .25% stake of the current employer and intend to negotiate an increase to .5% with my CEO, based on increased responsibilities and another offer, -- I want to protect that from dilution as I know the next round(s) of funding are looming, but I'm not sure of the best way to go about it. Any advice?
Thanks much
Fraser
frasermac2004@yahoo.com

 
At 4:02 PM, Blogger John Wilson said...

Fraser, these schemes are not uncommon, albeit they tend to only cover small proportions of the equity.

In your situation, as the percentages are small, this should be ok but it would be best if your CEO/Owners ring-fenced a portion of stock under this arrangement for a group of staff.

Alternatively you might discuss being granted options that would entitle you to buy a stated portion of the company at the time of exercise at a defined price. This has the same effect but can be easiest to implement since you don't need to maintain a set number of shares to persist the percentage.

 

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