Can non-dilutable stock (or equivalent) be issued?


4

I think I understand stock dilution (and I know in quite some cases it's not bad to get diluted) but I was wondering (it's mostly curiosity but I still think it's an interesting question for onstartups.com): can you issue non-dilutable stocks / stock-options?

For example: you get 1% over 4 years and once you're fully vested you know you'll have these 1%, no matter how many round of fundings (and subsequent dilutions) there have been.

I realize that if it's possible and if you issue to many of these, then you may be limiting your possibilities regarding potential investors.

But what if I still wanted to guarantee some percentage that wouldn't be affected by dilution to one very dedicated and very early employee?

Equity Legal

asked Jan 22 '10 at 08:10
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Tristan St.
180 points

3 Answers


5

I am pretty sure you cannot issue non-dilutable stock since every investment round will add more stock to the pool. You can have a non-dilution clause, in the financing paperwork, that ups the number of options/stock, at each round, so that investors are not diluted by that rounds investment. That is common.

Usually, non-dilution clauses are for investors and not for founders. The general rule on founders is they get to participate out of the stock option pool set aside for employees. If you want to approach non-dilution, that is typically done via side contracts that essentially grants people more options to make up for any dilution. I have seen this for executive level people like the CEO.

answered Jan 22 '10 at 08:28
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Jarie Bolander
11,421 points
  • +1 on anti-dilution clauses although most investors would only get that if you did a down round, not normally on an up round. – Dane 9 years ago

2

While this can definitely be done using anti-dilution or option contracts as discussed here I think there is a big negative impact to the future investor. You may find that future investors will make you cancel these before investing or will require the same provisions before investing. I think granting the same provisions to your investors would hurt you in the long run.

answered Jan 22 '10 at 12:17
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Dane
1,866 points

1

One way would be to draw up an options contract that gave you the right to buy a given percentage of the issued share capital for a nominal amount. That way at whatever time you exercised the option, you would be entitled to a fixed percentage of the company, regardless of how many shares had been issued. The contract could be structured to allow exercise in tranches at per-defined times, in line with any desired vesting schedule. Unusual, but possible...

answered Jan 22 '10 at 09:34
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Steve Wilkinson
2,744 points
  • True, but I'll wager no investor would agree to this because it means the founder gets "free" stock. – Jason 9 years ago
  • Agreed - probably no use for Tristan here - I've seen it used to good effect by investors wanting to take a fixed share from founders, protecting them against dilution if the founders want to give out shares to employees, for example. – Steve Wilkinson 9 years ago

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