Is there another way to dilute successful startup company stock that I've never heard of?


I am a founding investor in a 3 year old startup company and own about 2.5% of the company stock. I was initially involved as a consultant but I haven't been involved for the last 1.5 yrs. The Company has apparently made great progress and is now ready for Series A VC funding. Now the Company is threatening to dilute the value of my stock because I haven't been involved in the development of the company (which is not required in any agreements). They are claiming that most of the value of the company was created without my involvement and therefore, I'm not entitled to the resulting substantial increase in value that has occurred during that time period. This is a Silicon Valley Company. My lawyers (in a different state) say they've never heard of such a thing and think the company is bluffing me to get me to make a settlement. The Company however insists that this is done all the time in Silicon Valley and especially with early stage and maturing startups.
Any light you could shed on this would be most appreciated and helpful.

Legal Dilution

asked Mar 10 '12 at 14:05
9 points
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  • Are they planning on diluting the stock or just not paying you per share what the stock is worth? Do you actually have stock or just Options? Is your stock vested? – Karlson 12 years ago
  • I have the stock not options and it's fully vested. The Company is planning to somehow have the courts "adjust" my equity position so I'm not (as they say) unjustly enriched. – Robert 12 years ago
  • If you have an agreement under which these shares were granted to you and are now fully vested I don't see how they have a case. They can certainly dilute your stake in the company by issuing new shares – Karlson 12 years ago
  • My lawyer is satisfied that I indeed have documented ownership of the stock. He also shares you opinion about them not having a case. I'm still concerned because there's a lot at stake. They are sure being heavy-handed for not having a case. That's why I'm here asking if anyone has any experience with a matter like this one. I expect to see some dilution as the company takes on more investors and VC money. And if new shares are issued I would assume there has to be reasonable value received in exchange. – Robert 12 years ago
  • In exchange for what? If new shares are issued they are normally issued to an open market for the publicly traded companies. In case of private I am not sure. – Karlson 12 years ago
  • Just because a company's HQ is in SV it doesn't mean they're incorporated in CA. Find a lawyer proficient in laws of the state where the company is incorporated if your current lawyer isn't. – Dnbrv 12 years ago

4 Answers


on AIMs Under Rule 26 companies are required to provide certain information which is to be publicly available and up-to-date. which includes all the info that is written into the company policies about dilutions and consolidations and who has the overall say in what can and cant be done with the company,
so this info should be readily available for you to see where you stand via a company web site or via the nomad site of the is the rules of trading by the regulators that the info is made available,to which they must comply in order to stay with in the trading rules and regulations.and if they dont they can be suspended or even delisted from the stock exchange if the continually refuse to comply.
there for i would imagine that other trade organisations other than AIMS must have simular guide lines and regulations to follow.also the final statements may show these details i believe.

answered Oct 24 '12 at 15:12
21 points


I've looked through several sites with regards to dilution and the issue is that the company can actually dilute the value of your stock by issuing additional shares. And they don't need the courts to do it.

There are several resources that describe how this is done Wikipedia, Foolish Fundamentals, etc. Basically the situation becomes the following if the company is worth $1,000,000 and there 1,000,000 issued you can do the math of how much your shares are worth. Now if there are convertible bonds or new issuance in play which can be done by a startup at any time your stock value goes down since company is still worth $1,000,000 but the number of shares of common stock is now let's say $2,000,000. If the price of the stock goes back up you may make your money back but if not technically the stock price could be diluted down to nothing worth mentioning.

Now on the other hand what your lawyer and I have understood from what company is trying to do is they may be trying to force you to give up all or some of your shares, which I don't see how they will be able to do.

answered Mar 10 '12 at 17:35
1,779 points


I think another way they may be able to stitch you up is to issue warrants to them selves for services rendered,then consolidate the shares,and then use the warrants after the consolidation to give them selves more value than you have.but you would have to look in to that as I have not researched this,it was just a theory I have.

answered Sep 4 '13 at 21:09
1 point


Unfortunately they can be dishonest. Although you will always retain your shares the value of those shares can be reduced. (I asked a similar question here )

For example if you own one of the 100 shares in a $100 company then each share is worth $1. If they then issue another 100 shares and distribute them among themselves your value will go down to $0.5.

There are however some laws that give you some rights to buy shares if they issue more. I suggest you get another lawyer (on who understands dilution) and discuss it.

answered Mar 11 '12 at 00:01
Tom Squires
1,047 points
  • My question was is there a "different" way to dilute other than creating new shares? I am familiar with creating additional shares to dilute. When shares are issued to new or current shareholders there has to be some value received for the shares. – Robert 12 years ago

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