Which is the standard way of compensating against dillution?


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First some context to my question.

I started working in a startup a year ago. Since then I've been working part time on it (around 15-20 hours a week) in an informal way (no remuneration), while keeping my pre-existing paid and stable job. Now, the owner of the startup (who started it five months before I entered, and has been working on it full-time) has offered me 5% of stock and a fair remuneration to leave my current job and join the startup full-time. I developed a piece of code I will contribute to the startup when entering, and this piece, and thus my expertise on it, are fundamental for the business model of the startup (it is not viable without it). In addition, I consider that joining the startup at this stage is still quite risky. Currently we are four people in the startup, only the initial owner is working full-time.

Now the question.

Given the risk and my contribution to the startup, and the small percentage of stock I will be allocated, I would like to have some anti-dillution measures, in case more investors enter the company. However, the owner of the startup is completely against including any kind of anti-dillution measures. I am thinking about other kinds of compensation in case more capital enters the startup. For example:

  • Stock options
  • Increase of salary in case of dillution

Do these two make sense? Which other compensations are usual in these cases (if any)? In the case of stock options, which should be fair conditions to accept them (in terms of quantity, price, etc.)?

Compensation

asked Jan 5 '13 at 07:40
Blank
Lightman
8 points

2 Answers


1

The standard way to protect against dilution is to not do so. The by far most common way is that all shareholders get diluted pro-rata (equally relative to their ownership share) in subsequent rounds of financing.

If you feel that the percentage offered is unfair, then perhaps push for a larger share, not anti-dilution?

Regarding dilution, see also this about anti-dilution and the search.

answered Jan 5 '13 at 08:08
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Jesper Mortensen
15,292 points
  • Also this might be useful -- http://www.brightjourney.com/q/catch-offer-shareGiles Thomas 6 years ago
  • Yes, of course, I also tried that, but after much discussion it was impossible to obtain a larger share. What if the owner himself puts more money dilluting all others but not himself before we find a VC investor? – Lightman 6 years ago

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I developed a piece of code I will contribute to the startup when
entering, and this piece, and thus my expertise on it, are fundamental
for the business model of the startup.

And is there a clear understanding on who owns the code? Is it yours, or is it the companies? Without a written code assignment agreement, one can reasonably assume that you own rights to the code (not a lawyer, need to confirm).

Doubt anyone in the investment community would accept / invest in a company that has employees with an anti-dilution clause.

You want to strike a balance that helps recoup your time investment yet doesn't become so onerous that it kills investment deals. Find a good employment contract lawyer and get a reasonable employment agreement in place. If you find that you "own" the code, you can assign exclusive rights to the company for a percentage of profits for a finite time.

answered Jan 5 '13 at 08:01
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Jim Galley
9,952 points
  • The code has been written by me, and currently the startup has been using it in the cloud (as a service), but I've not shared with them a single line of code. In the moment I would enter the startup, I would have to sign an agreement by which the property of the code is transferred to the startup. – Lightman 6 years ago
  • Then you have something to negotiate with. Pick your strategy - royalties or equity - and best of luck. – Jim Galley 6 years ago

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