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by askafriend
2954 days ago
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I want to point out that dilution isn't strictly bad if the final sale price of the company is high enough. E.g. if the company sold for a billion, then 0.01% would be a cool million dollars. It's better to own 0.01% of a billion dollar company than 10% of a million dollar company. Dilution can be beneficial in cases when diluting equity for cash in the short term would lead to an increase in the overall value of the company in the long term (e.g. the tradeoff most venture backed companies make when swinging for the fences). The kicker here is that most companies are not billion dollar companies or even multi-hundred million dollar companies. Essentially, the role of dilution is different at different stages of funding and company growth. It can be a bad thing, especially if improperly used during a company exit like an acquisition. It can also be a good thing if it ultimately leads to a higher overall exit in the future. It's a financial tool that can be properly or improperly used and one which a regular employee doesn't have control over. That's why being able to trust leadership is critical when joining a startup. If you think the CEO won't do the right thing when the time comes to do the right thing, then all bets are off and your equity means nothing even if the company achieves moderate success. I know that most of what I wrote is super basic, but I've been seeing more and more comments around here that imply that all dilution is bad no matter the circumstances. But that just isn't the case. |
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