

Facebook movie and ethical dilution of partners  - aneth

In The Social Network, Eduardo signs a document that somehow allows the board to dilute his ownership to almost nothing.   What is that document?  Does he just lose his board seat?  Maybe some sort of veto right?  Maybe the Articles of Incorporation specifically allow this?<p>Issuing shares solely for the purpose of diluting one partner would generally be a violation of ethical and legal standards, as I understand it.  How would one protect himself from this without owning a majority?  How often does this happen?<p>I've heard of VCs "cleaning the cap table."  This sometimes seems justified, but who decides and how can it be done legally and ethically?<p>If the cap table is just temporary, and can be changed by the board through dilution, what meaning does it have?  However, if it can not be changed and there is a deadbeat partner, some sort of action like this may be necessary.  In facebook's case, as show in the film, I'm guessing they did this damn-the-consequences figuring they would pay Eduardo off some day, rightfully presuming it would be cheaper than leaving him with a huge stake.  
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The thing about shares is, if you have more than %50, then you can do almost
anything you want, provided that you haven't entered into an agreement with
the minority shareholders that prevents it.

So, it is important, if you are a minority shareholder to have an anti-
dilution clause in your agreements.

