

Ask HN: Share dilution - coryl

Hi fellers,<p>I'm actually a business graduate but I'm not very familiar with share dilution and corporate structure in terms of screwing someone over. I understand that the basic premise behind share dilution is when the compnay issues new shares; thus lowering the value of previously issued shares.<p>In The Social Network, Eduardo was apparently screwed over through dilution of his share ownership, but no one else was affected. Why was this? Did he have a separate, special class of common stock different from everyone else? Early angel investors/VCs do things to protect themselves from future dilution; what do they do, and how?<p>Thanks
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devmonk
I worked at a place where the original investors got royally screwed over time
due to dilution. Basically, as was learned in the early 2000's, don't take a
job for the options. And as an investor, assume that you might not always have
the control and input you start off with when you make that major investment.
It is fine to invest your time and energy into a company (and your money if
you want to go that route), but know that any company is a gamble, and it is
business, not personal. It's fine to be enthusiastic and love your work and
your job, in fact that's the goal, but you'll eventually get burned if you
think the people you work for really think of you as family, even if they tell
that to you (unless they really are family).

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aamar
_Basically, as was learned in the early 2000's, don't take a job for the
options._

This is not good advice. Options can be -- and often are -- a great
investment, amazing compensation for taking a risk with a job at a startup. Of
course it's wrong to think that an option as money in the bank. It's equally
wrong to think that they're worth nothing, to not carefully consider them as
part of joining a new startup, etc.

~~~
devmonk
You say it is not good advice, but then you say "Of course it's wrong to think
that an option as money in the bank." As an employee, would you rather take
money in the bank as salary, bonuses, and commission or would you rather risk
your hard work on options where there is a very good chance (no matter how
hard you work or how much you believe in the company) that the company will
never make good on those options, and even if they do, they will have been
significantly diluted by investors?

Just because you perhaps made money on options doesn't mean everyone would.
I've never talked with a developer that was significantly happy in his/her
choice of getting compensated for his/her work in options.

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aamar
A 25% chance to receive $1 is worth something. A 1% chance for $2 is worth
something too, as is a 100% chance of $0.01. Everyone here can work out which
of these is worth more than others, even though there's a strong chance that
any of these bets could "turn out" worthless.

The problem is that options are harder to value: there are many more result
scenarios and the math is a little more complicated. As a result, many people
opt out of doing the math entirely, and they think either "it's basically
worthless" or "it's basically money in the bank."

The latter error is much worse than the former, but here are two consequences
of the former: (1) one is less likely to work at a startup which might (in
reality) be the best choice, and (2) if one is working at a startup, one's
less likely to be nearly as alert to the risks and targets that may make the
option worth less or more (at least as a probabilistic matter). The latter is
why the options are a win-win for the company and employee.

By the way, I do understand that different people have different tolerances
for risk and for different kinds of risk. But even if someone is biased very
heavily towards low-risk situations (which is perfectly fine), it's best to do
the math, understand the risk/reward profile of the option and then apply that
against your own risk tolerance.

------
rewind
[http://www.litigationandtrial.com/2010/09/articles/litigatio...](http://www.litigationandtrial.com/2010/09/articles/litigation/news/mark-
zuckerman-on-his-cofounder-just-take-the-lawsuitim-just-going-to-cut-him-out-
and-then-settle-with-him/)

~~~
MaxwellKennerly
Thanks for the link. One very notable part of the Facebook dilution is that
Eduardo signed on to a shareholder agreement authorizing it, at least in part.
We unfortunately don't have the agreement in question to see how it worked,
though it seems that, by way of the agreement, Eduardo was not invested in the
new entity as fully as he should have been.

The interesting question is if he ended up with roughly the same share he
would have if Facebook had simply taken on the new investors and not tried any
"dirty tricks."

IANYL, but I'd say this: if you're at the point where you have more than a
basic agreement with co-founders, you want a thorough, diligent lawyer working
with you on these issues.

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adrianwaj
I'd talk to a lawyer: they'll know the ways you can get screwed over and help
protect you.

