Anti-dilution for founders?


I read that it is common/possible for investors to ask for anti-dilution clauses.

Is there a way a co-founder can protect himself against dilution? Of course, dilution will eventually happen during later rounds of financing, but it is possible/common for example to require that all co-founders are equally diluted in later round of financing?

Update The specific case could be that some shares are issued and they're distributed to investors and some, not all, cofounders (f.i. as a bonus). In this case the other cofounders (the ones that didn't received shares) are more diluted than the others.
Is that possible? In the case, how can someone prevent that?


asked Nov 20 '10 at 08:14
Filippo Diotalevi
2,573 points
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1 Answer


What you're suggesting is mathematically impossible.

First, let's start by looking at how an anti-dilution clause works by using a super simple example.

  1. The founder sets himself up a company and declares that it will have 100 shares. He owns them all, so he owns 100%.
  2. He sells 20 of those shares to an invester. Now the investor owns 20% and he owns 80%.
  3. Later he wants to raise more money, so he issues 20 more shares. Now there are 120 shares outstanding. So:

    • The newest investor has 20/120 = 16.67%.
    • The original investor has 20/120 = 16.67%.
    • The founder has 80/120 = 66.67%.
  4. The original investor is grumpy about this. He wanted to own 20% and to KEEP ON owning 20%. So he uses his anti-dilution clause allowing him to purchase more shares to get back up to 20%. Everybody launches Excel and runs Goal Seek to figure out how many shares he has to get. They discover that if they issue another 5 shares and sell them to the old investor:

    • The newest investor will have 20/125 = 16%
    • The original investor will have 25/125 = 20%
    • That leaves the founder with 80/125 = 64%.
If you're asking, "how can the founders protect themselves against dilution the same way," well, they can't, because there's nobody else to take percentage points FROM, and the percentage has to add up to 100%.

Now, if you're asking "how can you make sure all the co-founders are equally diluted," well, that's essentially automatic. Everyone without an anti-dilution right will naturally end up owning a smaller percentage of the company, equally, when new shares are issued.

This is just the nature of how percentages work; it has nothing to do with startup finance :)

answered Nov 20 '10 at 13:29
Joel Spolsky
13,482 points
  • thanks for the explanation. Is it possible however (please confirm) that some shares are issued and they're distributed to investors *and* some cofounders (f.i. as a bonus). In this case the other cofounders (the ones that didn't received shares) are more diluted than the others. Is that possible? – Filippo Diotalevi 13 years ago
  • Er, not exactly. Remember that the anti-dilution clause doesn't mean you give away extra shares (to the first investor), it means that the first investor has the *right to buy* extra shares. If one of the co-founders wants to buy some extra shares at the time of the second fund raise, most investors would be thrilled (to see the co-founder investing alongside them), but in this case the co-founder would really be in the position of a "new investor." **Anyway**, can you tell me more about your situation and what you're concerned about? – Joel Spolsky 13 years ago
  • Thanks again Joel, that's not really my situation. It is just a comment I heard from other entrepreneurs: to dilute the position of a single co-founder, you can theoretically issue shares and assign them to all the other co-founders and investors. I wanted to understand if that's something realistic, if it can happen and how one can defend from such a situation – Filippo Diotalevi 13 years ago
  • The question is, who is "you" in this situation? Every company has bylaws which specify the rules for issuing new shares. If a majority of the shareholders decide to screw over one particular shareholder, believe me, they can find a way to do it, because they have a majority of the shares. There may be provisions in the bylaws to protect minority shareholders under certain circumstances but that is a whole 'nuther question. – Joel Spolsky 13 years ago

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