Non-dilutable equity share

Apple
BaZrE6

Go to company page Apple

BaZrE6
2d 18 Comments

For people on director/VP level positions in startups: did you ever manage to negotiate a non-dilutable part of your TC, that is a portion of fixed percent from the company's equity which is unaffected by equity dilution? Or that's unachievable? #equity #startup

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TOP 18 Comments
  • TPG / Finance
    pach01

    Go to company page TPG Finance

    BIO
    I analyze startups for a living. Seed to Unicorns.
    pach01
    Highly unlikely. Any investor who sees is either going to run the other way or make you strike it and take a flat share amount.

    At the end of the day, your ownership % won’t matter. It’s a P*Q exercise.
    2d 5
    • TPG / Finance
      pach01

      Go to company page TPG Finance

      BIO
      I analyze startups for a living. Seed to Unicorns.
      pach01
      I’ll try to find some sources. My bible is the AICPA Guide to Private Equity/Venture Capital.

      It comes down to the unit of account and calculation based on the unit of account. Which for most VCs are going to look at the specific shares and share counts they own (the same is true for employees/founders).

      When a new round is raised at X dollars per share, we arrive at the post-money value which is equal to $X*Total Shares Outstanding (including all existing shares and options plus new shares).

      This continues on and on for each round. Typically a company will value the RSUs or Options via a 3rd party to arrive at their value. These are then issued that value. For RSUs if they’re valued at $20/share and you have 100k or RSUs, you received 5,000 RSUs. If you revived options, the strike price is the set as the value and and you benefit in any value accretion (value of said options are subject to assumptions used and perspective).

      When that new round comes in at $Y/share (if an up round), from an investor of the X round perspective , I know that I have some value accretion. To the extent is subject to assumptions but it’s fair to say it’s between $X and $Y/ share.

      The same value accretion occurs with common, RSUs and options but to a lesser extent (lower on the waterfall).

      I would bear caution of applying a new round’s share price to your RSUs or option as there is a lot that needs to happen for that value to reach those shares.

      Another way to look at it is a slice of pie, your slice of the pice might % be getting smaller but the pie is getting bigger and the area of your slice is increasing.
      Yesterday
    • Apple
      BaZrE6

      Go to company page Apple

      BaZrE6
      OP
      Saved this, thanks a lot! 🙇‍♂️
      Yesterday
  • Maybe you just watched “the social network” and are worried about getting the Eduardo treatment? Because you are way overthinking this. Every time the business raises existing investors own 10-35% less of the pie but the pie is (usually) getting bigger so as long as the business is on track your equity becomes worth more, not less.
    Yesterday 2
    • Apple
      BaZrE6

      Go to company page Apple

      BaZrE6
      OP
      No, I watched it a while ago and completely forgot that scene. Are you saying that selective dilution doesn't happen as it was shown in the movie, i.e. founder usually can't pick and choose whose shares are not going to be diluted because it will frighten the investors? From what I'm gathering from this and other answers it looks like anti ratchet or anti-dilution is unusual because it makes investment in your company less lucrative to potential investors. So I guess "overthinking" comes from that Eduardo scene being unlikely in the modern day startups, correct?
      Yesterday
    • Roblox
      aWvf33

      Go to company page Roblox

      aWvf33
      Everyone gets diluted every time a new round is raised generally and the very valuable people get more equity to motivate them / align their percentage ownership to their contributions.

      Absolutely selective stock awards are made. If you leave the company after 1 year and everyone else keeps growing the company you’d want a mechanism to make sure the people who stay get kept whole.

      In practice if you stay and do a good job you get more stock that makes the dilution less impactful to your overall ownership of the business.

      Without this system someone joining early on and leaving means you have a percentage of the company you’ll never be able to award to new people who do much more in the long run.
      Yesterday
  • Have had a few VP jobs in startups and never heard of a non-dilutable position. Even as an Angel I don’t think that’s something you can negotiate, best you do is pro-rata and as an investor you rate higher than some prima donna VP.

    Everyone just negotiates understanding you will get diluted with every new round, not really sure what the point is? Even if you did find some founder desperate enough to agree with it, they are just going to give you less non-dilutable equity to net out the same.
    2d 2
    • Apple
      BaZrE6

      Go to company page Apple

      BaZrE6
      OP
      How do you ensure that equity portion you've been given when joining early turns into good money if startup ends up successful/gets sold after a few events triggering equity dilution?

      Edit: taking less in non-dilutable shares makes total sense to me. After all you expect company to grow.
      2d
    • You just plan for dilution. It happens to every investor every time new money comes in.
      Yesterday
  • Google
    Scholtsky

    Go to company page Google

    Scholtsky
    How about anti ratchet
    2d 1
    • Apple
      BaZrE6

      Go to company page Apple

      BaZrE6
      OP
      Yep, seems like what I'm looking for. Is it a normal practice to have anti ratchet clause for people coming on VP level positions? Or it is unreasonable to ask?
      2d
  • Google
    Gooooooog

    Go to company page Google

    Gooooooog
    No such thing. Even founder and angel investors get diluted, why would a employee get special treatment like that?
    Yesterday 1