

As an employee, what guarantees do you have that your equity won't be diluted? - hpvic03

Can the founders&#x2F;investors could dilute your shares at will?<p>I understand that all shares gets diluted during investment rounds, but what I&#x27;m asking is: could your shares be singled out and diluted to nothing if the founders&#x2F;investors wanted to do so?
======
lubos
It can be done. For example majority shareholder can get a loan from the
company, then make company issue new shares and buy new shares using funding
from that loan. Cash doesn't even have to leave company bank account, it can
be done as an accounting operation.

It is one of the examples of shareholder oppression and it is illegal.

There are laws protecting minority shareholders but you would have to take the
case to court in order to protect your rights. It might not be worth if you
are defending small stake.

~~~
balladeer
> It can be done.

and

> and it is illegal.

So, that's like "It can not be done" legally, right?

------
rileywatkins
Typically, it's expected that as a company raises more money, it will probably
create more shares in the process. Even though your percentage of equity goes
down, over time the company should be worth more money (hopefully).

0.2% of an $80M company is better than 1% of a $1M company.

------
chakkop
They can and they do. Here are some ways:

1\. Management makes a share issuance, diluting all existing shareholders by
X%. Management then turns around and distributes shares amongst themselves.
Something like this can happen if management have majority control and can get
approval from their VCs/preferred shareholders (who have reserved matters that
can block share issuances). Often, the VC can work with management to get
something like this done.

(A more complicated version of this happened with the Zuckerberg/Saverin
saga).

2\. An option pool--say 10%--is issued as part of an investment round. This
dilutes all shareholders by 10%. The Board then distributes the option pool to
key management. There's nothing a minority shareholder can do.

------
nwatson
There's no guarantee. Anyone with a stake, including early investors, faces
the same issue. At my last company I thought I got an ok deal on signing but
after a couple of pivots and acquiring a smaller company my original stake
became increasingly small. I got decent follow-on options but the 4 year clock
starts over for each one.

------
lauradhamilton
If your question is, can the founder maliciously single you out and dilute all
your shares to zero because he hates you?

That would be illegal, and you could probably sue in that case.

If your question is, is it safe to do a business venture with people you don't
trust, my answer is no don't do that. There are many ways founders/investors
could make you unhappy if they wanted to.

------
jpd750
'guarantee' is the wrong word here, more description would be 'how likely'
with a response of very likely.

~~~
jpd750
*descriptive

------
RandyH
Hopefully, the company will only take additional money if it can be used to
make everybody's stake more valuable. So even though you have a smaller
percentage of the pie, it will be a bigger pie and you'll get more pie.

Of course, the best laid plans gang aft aglay.

------
gcb0
dilute all shares down to nothing, give new shares only to new investors and
founders.

wasn't that what facebook did? and isn't this exactly what restricted share is
for?

------
upliftshares
None, but the company may offer you additional "uplift" options to mitigate
the effect of the investment dilution.

------
spikels
Why would you not expect to get diluted? If you are very lucky you might get
offered the same terms as new investors. But why should you expect to get for
free what others had to pay for? If you want this, try to negotiate something
as part of your compensation but it would be very, very unusual. Good luck!

