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It wasn't a misunderstanding. I specifically asked if our options would be diluted in the next fundraising round and the founder said NO, they would be increasing our options to compensate for the additional issued shares.



>I specifically asked if our options would be diluted in the next fundraising round

I guess I don't understand what motivated you to ask about dilution and then believing a promise of no dilution since you're supposed to get diluted over time as the startup reaches maturity. Everybody is supposed to get diluted.

If a founder promised me "no dilution", I'd have to conclude either...

1) he doesn't understand the mathematics of selling equity (e.g. to maintain your 0.05% ownership, it has to come from someone else's shares since ownership % comes from a finite pie)

2) he does understand math, but he's a dishonest crook and therefore will tell you anything

3) he's mentally ill

4) he's absurdly generous of which I'd ask the same question 5 different ways to double check the more likely possibilities #1 through #3 again.


Because it was my first startup and despite days of research into how options work, I clearly still didn't understand it all. So I trusted his answer. I had no previous experience or knowledge that would have led me to believe that they wouldn't follow through with the promise to grant additional options over time.


Your company does not 'promise' you compensation - they have a contract for that.

If you were to have some kind of special 'non dilution' clause in your equity position (which by the way, no founder would reasonably agree to), then you should have it in writing.

But it's moot. One or both of you was obviously struggling with how all of that worked, because giving employees anti-ratcheting clauses is not something that should really be done. In fact, it should be avoided if at all possible even with investors.


> ... and then believing a promise of no dilution ...

He expected to get diluted. But he was also expected to be able to offset that dilution by being issued new options. Which would be a perfectly sensible thing for the company to do for a valued employee.


>offset that dilution

The typical mathematical mechanism that offsets dilution is the increasing price of the shares.

E.g. 16%(diluted) of $20 billion equals $3.2 billion whereas 50%(undiluted) of $0 equals $0. (I assume Larry Page loves the power of dilution.)

Basically, you own less percentage of a more valuable company.

>Which would be a perfectly sensible thing for the company to do for a valued employee.

But it would be nonsensical if the employee's diluted ownership is worth more. They are supposed to be worth more after a dilution because that means another new investor valued the company at a higher amount and bought a piece of the company. That piece of equity to sell comes out of the founders' share, the investors' share, and employees' share. It comes from everybody's share. Don't get mislead by dilution -- it's the total value of shares that matters.

Protecting an employee's fixed ownership percentage might come into play if there was a down round where the company was valued less than the previous round. The founder might then do something extraordinary such as dip into some of his own shares and give them to a valued employee to make up for the loss on share price. That would be an unusual remedy that's done on an adhoc basis. It's not something that's typically spelled out during hiring negotiations so I wouldn't think that scenario would have been the context of OP's question.

Many people incorrectly think of "dilution" as a synonym for "bad". If you work from that flawed premise, you end up asking financially naive questions and become susceptible to unrealistic answers from crooked/incompetent founders. In the spirit of the thread's title, learn to understand that dilution is normal and a good thing.




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