[gwd]

There is actually a sense to the dilution. If I have something I think is worth $10m, and I'm asking someone else to give me another $10m, doesn't it make sense for that person to own 50% of the company? Why would any investor give you $10m wile receiving no ownership of the company? How are you going to give these newer investors ownership, if you don't reduce the ownership of everyone else?

The claim in the tweet was that they got 1% of the value of the diluted shares: e.g., on paper they should own 1% of $100m, but somehow they only got $10k out of it. There does seem to be a culture of this going around now -- the VC version of "Hollywood accounting". In a lot of situations it doesn't make much sense to me -- is it really worth poisoning the well of startup talent for the VCs to get $95m instead of $85m?

[djoldman]

I don't think I understand.

If the value of a company is $10m and the company asks an investor to give $10m in exchange for equity, the investor should own 100%.

If the value of a company is $20m and the company asks an investor to give $10m in exchange for equity, the investor should own 50%.

[gwd]

> If the value of a company is $10m and the company asks an investor to give $10m in exchange for equity, the investor should own 100%.

That's not investing, that's buying. Buying means the buyer gives $10m to the previous owners, at which point as you say, the previous owner owns 0% and the new owner owns 100%. But the company is in the same position as it was before -- the same amount of cash on hand as it did before.

For investing, you're putting cash into the company's account, which raises the total value of the company.

Value of the company before investment: intangibles + pre-investment cash - debt = $10m

Suppose I own 10% pre-investment; 10% of $10m is $1m of estimated value.

Value of company after the investment: intangibles + pre-investment cash - debt + $10m == $20m

Now I own 5% of $20m, which is still $1m of estimated value. The investor owns 50% of $20m, which is still $10m of estimated value.

In practice of course, there are different classes of shares which end up being paid out differently.