# dilution of stock options for a company going through multiple rounds of funding?

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How can I have an idea of the dilution of employee stock options for a company that is going through different rounds of funding?

For example, a company that has received a total of \$100M funding up until now gives stock options at the moment of signing a new employee, always for the same valuation amount. Let's suppose they give \$1000 worth in stock options at the moment of signing over 3 years in batches of 6 months. Let's suppose that after a while, they go through another round of funding of another \$50M and they sign new employees and give them the same \$1000 worth of stock options, but now a different amount, given that the company has received more funding since last time around, and the pre-IPO valuation by the same company may have changed.

How can one calculate the ratio of dilution vs valuation between these two rounds in the stock options?

• It's not clear what you're asking. a "ratio of dilution to valuation" isn't something that has much meaning. Recognize that the company should be issuing stock options at an exercise price equal to the fair market value -- the employee only gets value if the stock price goes up. So, nobody gets "\$1000 worth of stock options" -- the option is worth almost nothing when first granted. – Chris Fulmer 8 years ago

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Here's a simpler way to think about it: you have an option pool, that is a small fraction of the total number of shares in the company. Say, 10%, which could be 100,000 shares. With those 100K shares, you need to offer options to your next 100+ employees. You do the math. As time progresses, employee number 500 is less critical than employee number 10. It's very common for employee #10 to get 10,000 stock-options, when employee #500, for the same skillset, will only get 1,000 shares (10 times less).

Think of your stock-options like a budget: you have some amount of stock, and you need to use it to pay future employees. Watch your allocation carefully.

• Also recognize that if you give your first employee 1,000 stock options shortly after the company starts, those will typically be more valuable to him than the 1,000 options you give to an employee 3 years later. Why? Because in the meantime, the exercise price will have increased. To get those 1,000 shares, the first employee will typically have to pay a lot less than the employee 3 years later. – Chris Fulmer 8 years ago