Understanding How Dilution Affects You At A Startup

techcrunch.com

24 points·spoon16··6 comments

When investors talk about dilution numbers they only present the best case scenario, and this post is no exception.

If you really want to understand dilution, don't look at the best case. You need a graph showing your payoff as a function of exit size. Pay special attention to the range where liquidation preferences and multipliers kick in, because the sharks aren't going make you an infographic for that case.

Have you seen anything like what you describe that you can share?

Unfortunately not. The people who have that spreadsheet would find it very hard to hire if employees knew how the game was rigged.

Actually, it looks like Fred Wilson did an example here: http://www.avc.com/a_vc/2011/10/liquidation-analysis-continu...

Note that his example does not show a multiple on the liquidation preference, and it doesn't show how the early employees can get screwed even when the founders do well. But it's more realistic than Suster's infographic.

Informative in a nice visual way.

Bottom line #1 - the actual sale price of the startup can have very little to do with what the founders get to take home (especially after taxes).

Bottom line #2 - (obviously) increase the startup value by orders of magnitude if looking for FU money.

Actually I didn't find the infographic that easy to understand. Here's a version I made that shows a large amount of money going into the business but the founder value increasing at a slower rate due to dilution: http://bit.ly/qO90k5

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