I disagree. The most common way to predict payout is to compare to other companies' exit valuations.
E.g. "Oh, company X got acquired for $250 million. We do something similar. If I own .025% of the company, I'd make $62,500 if we exited at that valuation. Cool."
It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% if you're lucky enough to have a successful exit.
>It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008%
But you're repeating the same error of prioritizing the wrong thing: dilution.
What employees ultimately care about is their wealth calculation: shares_multiplied_by_price.
Example of the type of math people actually care about:
0.008% (because dilutions) a $1 billion company is $80k
0.025% (no dilution) of a $100 million company is $25k.
People would rather have $80k than $25k. The dilutions that dropped them from 0.025% to 0.008% is irrelevant trivia.
For most employees that are minority shareholders, dilution is a side-effect calculation in the realm of academic trivia. Dilution is not a purposeful strategy in this situation. Highlighting "dilution" in advice for employees in an attempt to make them more financially more sophisticated has the opposite effect!
The scenarios for dilution to be a calculated strategy would be something like a founder considering 2 different offers from potential investors. One VC offers $20 million for 15% of the company. Another offers $30 million for 25% of the company. Or some founders selling too much of a percentage such that the dilution crosses some boundary such as 51% ownership where they collectively lose control of the company. These deliberate decisions around dilution are very different from employees realistically worrying about dilution dropping them from 0.025% to 0.008%!
You’re entirely (technically) correct. The issue is that side-effect often comes into play because employees like to calculate potential future outcomes, and that’s done based only on overall company value (since that’s one of the only data points that’s available from past acquisitions).
I’m sure you get this and I know the psychology of what an employee might hope for shouldn’t be relevant, but unfortunately it is.
(For those who don’t fully get this - what I mean is that folks often look at a potential outcome and say “other companies like this have been acquired for $1-2B vs $100B, so if I’m being given 1% at $10M my stake could be worth $10M!” When in reality after dilution, that stake might only be worth $2M, which is a very different outcome after 5-10 years of hard work at below market salaries.)
What you are saying, I think, is it is important to figure out what the expected future value of each of your shares are. All you have to go on, in general, is "what do companies like this one generally sell for"? From that, assuming all the preferred stock get converted back to common stock, you can figure out what each unit of stock is worth. The problem is, the cap table you have now won't be the cap table you have when the company gets bought out.
It's not dilution that is the problem. Dilution is just what happens when you bring in new money. It's that it is very hard to predict what a reasonable upper bound is for the future value of your shares.
Quite frankly, it is one of the big reasons I think trading salary for stock options is a horrible idea. Much better to treat those options are lotto tickets--the odds they pay out in any meaningful life changing way are very small.
Startups don't like to hear this because the truth is, when you work for a startup you almost always take a sizable hit to your salary.
Another aspect of this is that if you join an early stage startup and work there 5-10 years without any new equity grants (such as the annual refreshers that many companies give) while the company grows and does new funding rounds, then you're getting screwed badly.
I also think this downplays the liquidation preferences that come with taking venture money that also brings dilution.
A "billion dollar company" that raised $500M with a 2x liquidation preference will put many fewer dollars into an individual employee's pocket than a $100 million company that only raised $10m.
There’s a gotcha here. The VCs can disproportionally dilute early employees that they think are worth less by issuing new shares/options to founders or new hires.
It’s not true that everyone will always be diluted equally. Someone who isn’t involved in politics or paying attention to investor terms (oh, like an engineer maybe?) is more vulnerable to this.
> For most employees that are minority shareholders, dilution is a side-effect calculation in the realm of academic trivia. Dilution is not a purposeful strategy in this situation.
No, your logic would only hold for a public company with shares priced by a liquid market.
For a startup, percent ownership of fully-diluted shares is the key metric. (Other secondary factors, e.g. liquidation preference are also relevant.)
The strike price of the options is derived from the price that the most recent lead investor paid for the last shares purchased. This is not a market price -- the underlying value of the shares is often less.
But the options are effectively worthless until they are vested and a liquidation event, usually an IPO or acquisition, occurs.
>, percent ownership of fully-diluted shares is the key metric.
We are talking about different things.
I was talking about "dilution" as a verb/action that describes a _change_ from a starting % of ownership to a lesser % of ownership. The post I responded to was talking about dilution events.
Employees cannot realistically make calculated strategies around dilution _events_ because they are not on the board-of-directors and can't veto the founders to not accept additional round of funding. In any case, whether the employee's shares experience 1, 3, or 4 dilution events is not something people typically care about. What they want to really know is if they get wealthier.
On the other hand, if an employee is offered a # of shares as an incentive to accept a job, then yes, it's good to know if that means 0.10% or 0.05% ownership. It's smart to know if an employee is getting typical equity percentages in the industry that's commensurate with the role and timeline of the startup. (Some examples.[1]) However, that's a metric at a particular point in time and it's not a "dilution event" from the perspective of the employee.
Yeah, considering what I've heard about startup culture, I'd hope such equity payouts are a bit more than this. Anything less than $100k (note, a future expectation, and far from certain) is not worth accepting lower pay or long working hours for.
>you know only how much %% of a company is offered to you at the moment, not the future exit value.
But this "future exit value" is the same unknown for co-founders, angel investors, VCs, etc. Employees share the same unknown as everyone else as to what the eventual IPO or corporate acquisition valuation could be.
E.g. if an angel investor buys 5% of the company, he only knows his % ownership at that moment and not the eventual IPO price in 7 years. The angel also doesn't know what his eventual dilution will be. It really doesn't matter.
The angels and VCs ultimately cares about shares_times_price and that it has grown multiples of their investment. They already know they will get diluted because every owner gets diluted in the normal course of events. Selling equity to help it become a more valuable company means getting diluted.
E.g. When Accel Partners invested $12 million for 15% equity of Facebook in 2005, their investment got diluted when Microsoft later invested $240 million to buy 1.6% equity in 2007. That's how it mathematically works and it's normal. Dilution is a downstream math calculation side-effect of selling equity. The Accel partners didn't complain that they got screwed and owned less than 15% because the Microsoft investment diluted them. Also, neither Accel nor Microsoft knew what the eventual IPO price would be in 2012.
>how much %% of a company is offered to you at the moment
To be more precise, employees are typically offered a number of shares or options to buy shares instead of an explicit % of ownership. The % of ownership is a derived calculation at a point in time that's based on the number of shares. From that moment on, it's the price of the shares that ultimately matters and not the dilution because everybody's % of ownership will decrease as a normal event in growing companies that raise additional funding. Presumably, the startup hired employees that can contribute value so everybody's share price goes up which more than offsets the dilutive effects of accepting extra investment money.
A dilution event is always bad for the current stockholders. Of course getting investor money is a positive, but it can be a bad deal or the money can’t be wasted just leaving you with less overall ownership.
Don’t also forget you can have down rounds that can lower both your ownership and your share price.
I'm glad you said this. Many got burned including myself due to dilution events. When your 2% stake turns into 0.25% over time and you get paid last, there needs to be a very large buyout/IPO for you to get anything substantial. Add in the taxes paid on that and I would have been 10 times better working a corporate job with less headaches.
E.g. "Oh, company X got acquired for $250 million. We do something similar. If I own .025% of the company, I'd make $62,500 if we exited at that valuation. Cool."
It's important to be aware of dilution events so that you realize when you accept the offer that your .025% will be more like .008% if you're lucky enough to have a successful exit.