[bb88]

Owning shares in a pre-ipo company comes with it's own risks. And not wanting to be diluted from future investments is a valid reason to selling your shares.

It's possible for the company to dilute your shares turning them worthless, and then generates new shares. I'm sure there's lots of examples you can find of dilution, but that was what FB did to the former CFO as shown in the movie "The Social Network".

People keep talking about working for soulless companies when deciding to work for startups, but I can't think of a more soulless way to screw over your employees.

[mateo411]

It's true that the company might dilute your shares, but that also dilutes everybody else's shares too.

The greatest risk is the company won't be successful and your shares will be worthless.

[s1artibartfast]

It happens. I've herd it referred to as a cram down +pull through. There are lots of ways to top people up after dilution.

Example: Cap table: Founder 10%, ex-employees 10%, VC 80%

Step 1) Company takes a down round, VC put some small money in, dilutes everyone 10:1.

Step 2) New stock plan with 10% for founder

Cap table: Founder 11%, ex-employees 1%, VC 88%

Step 3) Founder and VC high-five

[zwily]

See: The Social Network. I now refer to it as “Getting Eduardo’d”

[HWR_14]

Isn't that something the exemployee would be able to sue over? Like, it's clearly fraudulently done to steal their equity.

[bb88]

Yes, but you have to sue over it. For most people, it's probably not worth it. Besides, since it's a private company, equity is what the board/executives say it is.

[HWR_14]

> Besides, since it's a private company, equity is what the board/executives say it is.

Can you clarify that?

[s1artibartfast]

Maybe they meant valuation is what the board say it is

[s1artibartfast]

Dilution is extremely common and a lot of this funding stuff comes down to businesses strategy. My example was extreme, but there is tons of gray area for this kinda thing

[HWR_14]

Ah, if you were exaggerating the numbers to explain the concept, I can see how a more subtle screwing would be nonactionable. I thought you were saying they were that blatant

[s1artibartfast]

I think it certainly can be that significant or more. Someone else mentioned Facebook cofounder Eduardo Saverin. At IPO, Zuckerbergs's equity was down to 28% and Eduardo had been diluted down to 2%.

That is a co-founder of a high profile unicorn with continuous growth. Now imagine what can happen to employee # 1000 at a shady middle cap startup struggling to get to market.

[bb88]

I think you missed the point about issuing new shares. Everyone doesn't end up diluted in that case.