Ask HN: What assurance do early startup employees have against dilution?

None. Early investors often have a ROFR (Right of first refusal) in their share agreement, in which case they will have the right to buy shares proportional to the amount of dilution they would otherwise suffer (so they can maintain their % stake in future funding rounds) but I've never heard of an employee having that right.

Also note early investors often have a liquidation preference meaning they get their money out before subsequent investors but this also isn't something which is usually extended to employees.

You will get diluted beyond all belief. Not just by investors but by future grants to employees. The best that you can hope for is that that dilution corresponds to growth in the equity of the company such that you own a smaller share of a larger pie and in overall dollar value your stake becomes more valuable or at least maintains its value. It's worth mentioning that in the vast majority of startups this does not end up being the case and equity ends up not being that valuable. There is a very small probability of a lifechanging exit though which is why people go for it.

> Early investors often have a ROFR (Right of first refusal) in their share agreement, in which case they will have the right to buy shares proportional to the amount of dilution they would otherwise suffer (so they can maintain their % stake in future funding rounds) but I've never heard of an employee having that right.

FWIW, what you described isn't right of first refusal. ROFR specifically refers to the right of an existing investor to buy shares when another investor wants to sell to a third party. E.g., let's say A has a right of first refusal, and B wants to sell at $20 / share to C. With ROFR, B must offer $20 / share offer to A first.

The right to buy shares proportional to existing ownership percentage is called a pro rata right. If a round of funding would dilute your 1%, you have the right to buy in at the pricing of that round to keep your percentage ownership constant.

This is all true but it's important to remember dilution IS what you want if you're signing up to work at a startup. No dilution means no growth, flat and simple. If your founders aren't expanding the pie, what chance do you have of walking away with a payout?

Larry and Sergey owned 100% of $0 and like, 20% of $1 trillion. Which would you rather have?

Kinda. It depends on whether the business has a positive enough return on this additional equity to offset the dilution, in which case it is absolutely what you want.

For example, if a new employee comes on board and gets a grant everyone else gets diluted a bit. This is a good deal if the new employee will generate sufficient value to offset this dilution. I think we can all come up with examples where this would or would not be the case.

Likewise with investors. Sometimes a new round will be exactly what a company needs to light the touchpaper and everyone will see a huge benefit in spite of dilution. Sometimes it’s just more cash on the big bonfire and not only does it not fix the fundamental problem but also hurts all the existing holders to add insult to injury.

I completely agree, but my point is that there's not really a situation (at a VC funded tech company) where you're not getting diluted and you're still getting growth on your equity

None. I was a key share holder with >5% in options. I was diluted to 2% over multiple seed financing rounds. Additional grants were issued to compensate. There were a couple of down rounds. Options were repriced. The company was later "acquired" for peanuts in a fire sale (pennies on the dollar) and none of the early investors received anything.

My advice: don't over value your equity compensation.

Getting diluted for fundraising rounds makes sense. Where it gets shady is getting diluted from additional equity grants to existing founders that are majority shareholders, disguised as e.g. CEO compensation.

Or stuff like the founder's kid gets a large new equity grant for joining to create the company esports team (in a company with nothing to do with esports).

Founders kid, wife, second cousin stuff is great. So fun to work for those companies.

Every new/subsequent round of funding will dilute your shares or options. If you have good management and investors, they will add "anti-dilution" shares when new funding is taken so early hires are re-incentivized. Stay on their minds via performance and make sure they know you know about "anti-dilution". If they think you are essential they will make sure you stay.

Remember that ALL early investors are diluted when new money comes in. For example the first Angel investor may opt to add more money to new investment rounds to buy anti-dilution shares. Think of your continued contributions as adding more value in return for anti-dilution shares.

That said, getting rich from options is a fool's bet. Take a good salary then save and invest it. You'll be better off and the risk is much lower. You are far too close to the situation right now to judge the likelihood of success for your startup and have no idea how many factors hidden to you will make or break that bet. FTX, Theranos, ...

The reason VCs can play this game is that they have certain advantages and they place 100 bets to one success. You can place only one in that same timeframe. Even they would not play that game.

Agree with everything except the last bit. As an early employee you have way more influence on company success than investor. You also have way more visibility into it if you decide to jump ship.

Generally speaking, in terms of risk early employee has an unfair advantage over investors (though investors have other ways to mitigate that risk, like liquidation preference).

The majority shareholders do have a fiduciary duty to all shareholders, thus if they grant themselves unreasonable compensation you would have basis to sue them.

"Control shareholders have a fiduciary duty to the minority shareholders to act with 'good faith and inherent fairness.' As such, majority owners have a fiduciary responsibility not to use their influence to engage in self-dealing, including actions that are unfairly prejudicial to the minority shareholders."

See: https://ffslaw.com/articles/have-the-controlling-shareholder....

If everyone gets diluted for new funding that's one thing and you have no protection against that. But if the 51% just vote to fuck over the 49% that's very different.

Short answer is none.

Everyone is diluted during a financing round.

Long answer: some early or critically important employees will receive grants after a round to offset some of the dilution.

Thanks! What about if founders/board decide to "take away" your already-vested equity after you leave the company, by issuing new shares to all shareholders except for you? Is there typically anything preventing this aside from goodwill/reputational concerns?

This is extremely rare and enough case law exists that you would be able to sue them for doing so. It looks extremely nefarious in court and is a bigger headache than it’s worth.

I’ve never heard of this happening successfully. What you’re probably asking is “how can they screw me?” And the answer is if they terminate you before youre vested. That’s why as an early employee you want to negotiate some type of accelerated vesting schedule.

This is somewhat common and can be done legally. Search for "cram down" or "recapitalizing". It is usually done when a company is about to go bankrupt and a new investor comes in, but wants to clean up that cap table of existing shareholders (who would lose everything if the company went to $0 anyway).

Technically the existing shareholders are asked to agree to the changes as a condition of the new investor(s) putting money in. Sometimes they are given the right to put in money to keep a real position in the newly-recapitalized company.

But at that point the company is dead anyway, so it’s not about screwing OP out of their equity but about completely rebooting the company.

Very interesting and good to know! I'm relieved that this is something that's done in the event of near-bankrupcy and not something that founders use to shadily "take back" equity from departed early employees.

If you aren’t a founder or investor then your chances of making significant money at a startup via equity is very limited.

You WILL be diluted during every fundraising round and you will be subject to lockout periods. You may exercise your shares if you leave early but you take enormously doing that.

> My best guess is that the situation works something like this: As a Key Shareholder (>1%), you have to approve the issuance of new shares.

"Key shareholder" isn't a thing. Shareholders elect/appoint board members. The board issues new shares. A shareholder with simply >1% of equity, say 2%, has no power over the board.

You, as an employee, have no guarantees against dilution. Dilution isn't necessarily a bad thing IF the overall value of your equity increases (e.g., the company raises at a larger valuation).

The odds of the board deciding to screw over one employee with a small share of equity seem quite low. The potential legal costs and reputation risks will most likely outweigh the cost of either buying you out or, what is most likely, doing nothing.

I've heard/seen so many cases where equity compensation for ICs in startups were drastically devalued/"diluted"/rendered-unsaleable to ever consider a startup's equity compensation unless they acknowledge that an individual taking below market cash compensation is an early stage investor, and their equity grants should be the same class as other early investors, and have the same options w.r.t to cashing out, maintaining.

I've yet to see any startup do this though, which to me indicates that the intent is to scam the IC.

Like others said.

Equity compensation is essentially a legalized SV scam.

If you're an employee #6+ and not an insider - just negotiate a salary figure and/or work conditions.

Even if your shitty startup gets money laundered (I mean acquired) for 12 figures you are getting exactly zero of these figures.

That's a plan.

And startup lawyers smiling you into signing "just a standard" contract are getting paid big figures to laugh you out of the door after exit transaction.

None! I don’t think being an early employee at a startup has been a good value proposition for a while, maybe ever. Far far far safer to put in 5-10 years at a FAANG and then start your own company.

None. VC firms like YCombinator pioneered the "liquidation preference" whereby the gains that used to accrue to startup employees now go entirely to the venture capitalists.

In short, the startup lottery is just a fiction now, perpetuated by VCs to create an endless treadmill of labor.

Mindset wise, forget about getting rich through options. That said it is worth haggling for more once you have haggled the salary as high as it can go.

The last time I got some, not much, 75% of the profit was from post IPO: so could have achieved the same thing by working as a contractor elsewhere for more, then buying at IPO :-) “But your a shareholder now you should put more effort in” they’ll say lol

A lot of good info here. One thing to add is that in the end, a lot comes down to trust. A dilution aimed at screwing specifically you is unlikely. If you are joining a company where you have reasons to think that this might happen, find another company. It’s hard to get anything constructive done in such a low trust environment.

Ask for a smaller percentage but a non-dilution binding agreement where you are awarded more shares per funding round to maintain ownership level.

Have you ever heard of this being actually possible, as an engineer? In Silicon Valley you would be told to go pound sand in virtually every VC-backed startup, in my experience.

Founders who are ok with you getting rich is the only assurance.

Then things might work out, but the nature of startups is they probably won’t.

Good luck.

None. You will get scammed.

Absolutely none