Incentive stock options dilution

Stock Options | GitLab

Last week I kicked off my MBA Mondays series on Employee Equity. Today I am going to talk about one of the most important things you need to understand about employee equity; it is likely to be diluted over time.

That is usually in the form of founders stock. If you never raise any outside capital and you never give any stock away to employees or others, then you can keep all of that equity for yourself.

It happens a lot in small businesses. This can be done in options but is often done in the form of restricted stock.

Sometimes they even use "founders stock" for these hires. At this point the founders own Now the founders own That means the dilution from the option pool is taken before the VC investment.

ESOs: Accounting For Employee Stock Options

There are two diluting events going on here. So the founders now own See the spreadsheet below to see how the dilution works in this round and all previous rounds. This rolling dilution calculation is just an example.

Startup stock options explained | Max Schireson's blog

The point of this exercise is not to lock down onto some magic formula. Every company will be different.

Compensation: Incentive Plans: Stock Options

It is simply to lay out how dilution works for everyone in the cap table. Here is the bottom line. If you are the first shareholder, you will take the most dilution. The earlier you join and invest in the company, the more you will be diluted. Dilution is a fact of life as a shareholder in a startup.

When you are issued employee equity, be prepared for dilution. It is not a bad thing. It is a normal part of the value creation exercise that a startup is.

But you need to understand it and be comfortable with it.

I hope this post has helped with that. October 4, — MBA Mondays. AVC Menu Home Archive About Subscribe Twitter.

Dilution Last week I kicked off my MBA Mondays series on Employee Equity. The typical dilution path for founders and other holders of employee equity goes like this: October 4, — MBA Mondays Tweet. Newer post I Told You So Older post The Postmortem.