Ask HN: Share dilution
Hi fellers,
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.
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?
Thanks
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8 comments
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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.
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.
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.
1) Work at a non-startup company for more cash upfront with very little to no potential upside.
2) Work at a startup for little cash upfront with large potential upside.
To each his own.
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.