Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 4 down vote favorite

I think I understand stock dilution (and I know in quite some cases it's not bad to get diluted) but I was wondering (it's mostly curiosity but I still think it's an interesting question for onstartups.com): can you issue non-dilutable stocks / stock-options?

For example: you get 1% over 4 years and once you're fully vested you know you'll have these 1%, no matter how many round of fundings (and subsequent dilutions) there have been.

I realize that if it's possible and if you issue to many of these, then you may be limiting your possibilities regarding potential investors.

But what if I still wanted to guarantee some percentage that wouldn't be affected by dilution to one very dedicated and very early employee?

share|improve this question

3 Answers

up vote 4 down vote

I am pretty sure you cannot issue non-dilutable stock since every investment round will add more stock to the pool. You can have a non-dilution clause, in the financing paperwork, that ups the number of options/stock, at each round, so that investors are not diluted by that rounds investment. That is common.

Usually, non-dilution clauses are for investors and not for founders. The general rule on founders is they get to participate out of the stock option pool set aside for employees. If you want to approach non-dilution, that is typically done via side contracts that essentially grants people more options to make up for any dilution. I have seen this for executive level people like the CEO.

share|improve this answer
+1 on anti-dilution clauses although most investors would only get that if you did a down round, not normally on an up round. – Dane Jan 22 '10 at 1:39
up vote 2 down vote

While this can definitely be done using anti-dilution or option contracts as discussed here I think there is a big negative impact to the future investor. You may find that future investors will make you cancel these before investing or will require the same provisions before investing. I think granting the same provisions to your investors would hurt you in the long run.

share|improve this answer
up vote 1 down vote

One way would be to draw up an options contract that gave you the right to buy a given percentage of the issued share capital for a nominal amount. That way at whatever time you exercised the option, you would be entitled to a fixed percentage of the company, regardless of how many shares had been issued. The contract could be structured to allow exercise in tranches at per-defined times, in line with any desired vesting schedule. Unusual, but possible...

share|improve this answer
True, but I'll wager no investor would agree to this because it means the founder gets "free" stock. – Jason Jan 22 '10 at 19:04
Agreed - probably no use for Tristan here - I've seen it used to good effect by investors wanting to take a fixed share from founders, protecting them against dilution if the founders want to give out shares to employees, for example. – Steve Wilkinson Jan 22 '10 at 22:22

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.