Employee Equity: Dilution
avc.com
avc.com
As for the factuality of the movie's dilution scene, as best I can tell the reduction in equity was somewhat less dramatic, but not that much. Instead of nearly a third of the company, Eduardo owned 7% according to several business blogs & Wikipedia (but no credible news sources, from which I can't find a citation about any number). This was reduced to less than a tenth of a percent, but later settled at about 5% (citation: http://bit.ly/aDms3t) for what amounted to about 6 months of involvement.
Preferred Share Liquidation Preference is another landmine.
I know at least one (world class valley player) early epinions employee who walked away with almost nothing - The common shareholders got screwed when epinions merged with dealtime to form shopping.com - but he had already left the company for another gig, so there was really zero benefit to taking care of him.
At Oblix, anybody who was an ex-employee ended up with zero on equity when they sold to Oracle for $85 Million - preferred shareholders ended up with everything. Existing employee who made it through the transition landed a retention bonus, and the founders (some of who were no longer at Oblix) picked up a "consulting" bonus to make sure the deal went through and they didn't block it.
A few lessons learned from all these experiences:
o At the end of the Day, you really are at the mercy of the Majority Shareholders, regardless of what equity you think you may have - unless you are prepared to go to war in court.
o Always be aware of how much leverage you have with Founders Stock. When a final sale is going through, you may not have enough voting stock to defeat the deal, but you may have a large enough block to mount a legal challenge - it might be easier, and cheaper, and certainly less risky to simply buy you off. Protect your position.
o Stay close and friendly to the CEO, VCs, and Board Members driving the financial structure (typically the ones selected by the VCs) They will be the ones who can re-up you when the dilutive rounds hit the company, or hand out "retention" bonuses after a sale - and they are the only ones who really have a clue as to what machinations are taking place.
o Probably most importantly - bring unique value to the table that the company requires to succeed, and continue to succeed after a sale. I remember walking out of "The Social Network" wondering how on earth Eduardo manage to walk away with 7%. The way I watched the movie, Facebook succeeded despite his efforts to slam it with Ads too early, and his inability to pull in Angels like Thiel. And how he wasn't sitting right beside Mark night and day, is beyond me. And seriously, how could he claim to be the "CFO" and not be intimately familiar with each and every clause of the stock events that were taking place. It was liked he'd totally checked out and was just showing up now and then to see what was happening at the company. The movie was very unsympathetic to him. Now I have go read "The Facebook Effect" and "The accidental Billionaires"just to see if they portrayed Eduardo in a more sympathetic light.
The movie portrayed Sean Parker as playing a much, much larger role in Facebook's success than Eduardo - yet they ended up with similar amounts of equity, which befuddles me.
[1] Professional employment organization, aka "employee leasing"
I've found a PEO, itself, tends to cost $100-$500[1] monthly per empployee. How much (presumably in time, not dollars) does the collective bargaining cost you?
[1] At 4 employees
https://spreadsheets.google.com/ccc?key=0Ap9s-bcx0E1adGh4cVJ...