How can a past employee protect themselves against share dilution?


8

What is share dilution?

How can I, as a past employee of a company where I exercised my share options, know if my shares are subject to dilution?

How can I protect myself in future from share dilution?

Funding Equity Investors Shares

asked Apr 23 '11 at 01:24
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Nissan Dookeran
177 points
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2 Answers


12

Share dilution is when the percentage of a company's stock that you hold is decreased through the issuance of more shares or the company issuing convertible securities. While the absolute number of shares that you hold remains the same; the total number of outstanding shares is increased, thereby reducing the percentage of shares you hold.

As an employee, your shares are always subject to dilution - any time the company raises additional capital, your shares will be diluted. Assuming everything is going well though, the amount of the dilution will still be less than the overall increase in value. That is, if your share in the company drops from 1% to .75% but the overall valuation of the company increases from $10M to $20M, your share is now worth $150,000 instead of only $100,000.

Ultimately, as an employee, there's really nothing you can do to protect yourself from dilution. Investors will typically include anti-dilution provisions to prevent this, but these typically are only available when you are investing in a company, not as an employee.

answered Apr 23 '11 at 01:35
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Alex Miller
632 points
  • Thanks for the suggestion - edited the first paragraph to be a little clearer about that. – Alex Miller 8 years ago

-3

Dilution of shares means when a company merging with another company the share value of a company generally decreases with increase in the number of shares out standing but capitalization of a company remains the same.

answered Feb 17 '12 at 21:52
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M.Krishnachaitanya
1 point
  • -1 Dilution doesn't require a merger, capitalization can change (e.g. investment funds), and this didn't answer the "how to protect myself" part of the question. – B Mitch 7 years ago

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