How does equity dilution work for startups?

Discussion in 'Stocks' started by Phill Twist, Jun 4, 2017.

  1. If you are one of the early employees, investors or any kind of stakeholder, what steps, if any, can you take to prevent your equity from being significantly diluted?

    On the flip side, what's the typical strategy for key stake-holders (perhaps with all the voting rights), both in a "maximizing gains" kind of way and in a "what's fair" kind of way?
  2. speedo


    Your question is rather broad and frankly all over the place. A startup can raise capital a number of loans (very difficult without pledged collateralized assets), factoring receivables should they have any, securitizing receivables (bonds, another form of debt) or issuing stock (dilutative). "Stakeholders" or employees have a say in how said capital is raised if ownership (shareholders) allow them to have a say. Most startups are not under the restrictions of union contracts.

    Issuing stock is not only the most common way of raising capital for a startup, it may be the only option therefore restricting dilution may not only prevent a company from growing, it can prevent it from surviving. For a legitimate stockholder concerned about dilution, it would be best to consult a corporate attorney for the intricacies of such as addressed in the articles of incorporation, corporate resolutions and subsequent amendments.
    Last edited: Jun 4, 2017
    tradethetrade likes this.