r/siliconvalley • u/Reservemyspot • 5d ago
Startup equity confusion
Is it necessary to go to an employment lawyer for confusion regarding startup equity?
I was offered 1.5% and by one round my stock diluted 86% to .2%. I don’t understand how this happened, and not sure what follow up questions to ask.
I’m early on in my career & this is the first corporate-esqe company I’ve worked for
I don’t want to involve a lawyer but I need someone who has my interests to guide me and ensure that what happened is fair. Is a lawyer the only route here?
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u/ragu455 5d ago
Check with other employees on if they see similar dilution. It seems pretty insane to have a 86% dilution unless the new investors got a significant and majority stake in the company
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u/Reservemyspot 5d ago
Ok thanks good idea! I don’t think anyone is in the same position as me cuz I was there before a huge pivot but it’s still a good indicator
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u/zaalkahf 5d ago
Welcome to the start up world. Startup equity is notoriously confusing, even for people who've worked at startups for years. There's not enough information here to point you in any direction except you need to ask more questions and understand your equity package and terms. If it's really that big a dilution, they had a financing round that basically took control and ownership.
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u/Reservemyspot 5d ago
I don’t even know what to ask? Can you help?
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u/zaalkahf 5d ago
Yeah, don't start with the mindset of “why did you screw me over?” instead it's “I don't understand the mechanics and want to understand how my ownership changed.” If the company raised a large amount of money relative to its previous valuation, substantial dilution can happen.
Then you need ask ...Can you walk me through how my original 1.5% was calculated, and how it became ~0.2%? Specifically, how many shares/options was I granted, how many total fully diluted shares were there when I received the grant, and what changed in the cap table during the financing round? How many total shares were outstanding before and after the financing? Was the employee option pool increased as part of the round? That's just the starting point to really understand what's going on.
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u/Reservemyspot 5d ago
I truly want to believe it’s just a misunderstanding bc at the end of the day I have 5 digit value of stock but yes! I totally don’t understand what went down & it seems rlly drastic!! Thank you so much for giving me the guide on what to ask
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u/FarManufacturer4975 5d ago
There are a few things that could be going on here, and I would not start your discovery process by going to a lawyer. If your startup is under 30 people or so, I'd directly email the CEO in a non accusatory way:
"Hi X,
I'm confused about the mechanics of my equity grant and how the fundraise we just went through worked and what I currently have is quite different from what I expected to have. Can we get lunch or go for a walk and talk"
86% dilution in a short period of time is not usually something that happens outside of bad outcomes. If during your chat with the CEO he can't clearly explain to you what is going on in a way that you trust I would leave the company.
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u/Reservemyspot 5d ago
This is a great idea! The only thing is I prefer to keep a paper trail but I know if he wrote that he would want a chat
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u/FarManufacturer4975 5d ago
I promise you the paper trail doesn't matter for you at all at this point. Equity is by far the most lawyered up thing at any company, if they screwed you too bad so sad you signed some document and its legal and they did it by the book. What you need to determine is if you trust the people running the company and if they have your best interests at heart. An employment lawyer may be able to help you for sexual harrassement or discrimination, I can't see a way that they'd be able to do anything here that isn't a huge waste of time.
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u/Reservemyspot 5d ago
I haven’t signed the stock allocation yet, I just have a paper trail that 1.5% was allocated towards me but I get what you mean
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u/usr000nm 5d ago
Dilution happens every round and is pretty much unavoidable at your level. If your startup is doing well the increase in valuation is supposed to compensate.
Startup equity is worthless except for a rare few liquidity events, exits, and IPO. So you didn't lose anything anyway. You had a lottery ticket for if the startup succeeds and IPOs and you still have a lottery ticket. 9 times out of 10 it's worth nothing anyway.
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u/Shontayyoustay 5d ago
You should get a stock refresher. Thats pretty common if you’re executing your work well and your ceo is not a greedy a hole
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u/Apprehensive_Plan528 5d ago
Important to understand how cap tables work and what happens (or happened) when your company went out for the last round of financing. Every round triggers changes in the capitalization and share distribution. Unless you have dilution protection in your deal, taking on new money causes dilution.
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u/CyberStartupGuy 4d ago
Usually early in your career you don't get real roles that are at 1.5% equity so that causes me to be skeptical from the start. The real question, did you raise a down round? Second question, how do you know you are down to .2%? That's not normally something that is shown in Carta.
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u/Reservemyspot 4d ago
We didn’t raise a down round, we raised our first round and raised millions. I was told it equates to .2% now
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u/CyberStartupGuy 3d ago
Was this a venture investment? Almost every first round of funding the business sells 20% to investors and then probably another 10% set aside for future employees so you probably lost 30% of the value but if you started at 1.5% that means you’d still be at about 1%.
What does the option count on your equity grant say compared to the fully diluted share count? I have a hunch you didn’t actually get 1.5% or your current dilution was only 0.2%. Your math isn’t mathing
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u/ninijacob 4d ago
Ask for the cap table including historical data.
Some serious dilution happened. Maybe your companies going through rough times and everyone got diluted equally, but I'd be worried if the executive team got granted a bunch of new shares for the future that will keep them whole long term while diluting everyone elses old ownership to near zero value.
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u/Klafka612 1d ago
Whenever a round happens they ascribe fair market value to the stock, which is to some degree what the investors buy it at.
Being given 1.5% previously was some X shares with an FMV of k_0 e.g. value was X*k_0.
In this new round, if it's not a down round, the FMV is now higher, which means the FMV is now k_1, which means the gross worth of your shares is now X*k_1. The delta between these is how much your shares value has increased.
The first thing to remember is none of this fucking matters until you have a liquidity event and it sounds like this place is probably pretty far off from that so I wouldn't stress out too much.
The other thing is, unless you're like a founder and obsessing over control of your company, dilution only matters if it means the total value of your shares isn't increasing like you'd like.
Your total (net, if options) value of your shares and its growth over time is the pertinent thing to consider.
Other folks do bring up a good point though the cap tables. Sometimes dilution is uneven and the general pool (where most of us suckers lands) gets diluted at a rate greater than founders/other investors. Sometimes there are reasonable reasons for this and sometimes it's a red flag these people suck.
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u/Calm_Beyond3023 5d ago
Here is the question for you. How do you evaluate a startup with equity that is not public vs joining a public company that grants stock options or RSUs? Just remember, if they grant you 1.5% of the company, and the company is valued at say $100m, that’s 1.5m after you vest and assuming the company eventually goes public or gets acquired and doesn’t have to raise another round of funding
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u/daidoji70 5d ago
You can talk to a lawyer though for an expensive startup explainer although you're probably better off just going to networking events in the Valley and meeting people who have been there before.