The typical defense against this is a pro rata investment right - if the company tries to conduct a financing at an artificially low valuation, you are allowed to invest alongside the investors to protect your percentage position.
If you had this right, and felt 150k was too much money to support your position, you could have gone out and borrowed the money from another investor.
To be honest, if at a 1M post money valuation you couldn't justify defending your position, the company was probably, in fact, approximately worthless.
This is speculation, but this doesn't have to be all that unreasonable:
Since OP had only 15% it doesn't seem likely that this was a "The Social Network" style trick to actively screw him out of his equity. More likely that it was really an internal round - no new outside investors could be found and the company was out of money. OP had left the company by this time and didn't value their shares enough to participate. Presumably the 15% had been vesting over 4 years, so a company that is out of money, can't raise more and had been at for >4 years, suggests to me that the 15% was really not worth much before the internal round.
So if you own a minority stake in anything, you can be told at any time that it has been reduced to a value of zero?
I guess this makes sense if they alternative was bankruptcy. If you can't inject money to help at a critical time, then I suppose it makes sense that the business you have a share of is basically worthless, and only the one that has more money is worth something.
Is this just routinely abused to disinherit a shareholder? Does this mean that being a shareholder is just about finding alliances you can use to screw others over, until you eventually get screwed yourself?
Owning equity in a startup doesn’t guarantee financial security. Understand the risks associated with dilution and internal funding rounds, and consider diversifying your investments to mitigate potential losses.
Don’t blindly trust leadership or assume they always have your best interests at heart. Stay informed and be willing to challenge decisions that could negatively impact you or your stake in the company.
Agreed w others, a workaround is see if any other VCs want your pro rata at some discount, where they front you the money and you agree on some split. The startup likely has right of first refusal, which begins a negotiation.
Presumably if an internal round, the company is dying, so nearly worthless, just IP and team. The new worth is almost entirely the $ going in, and the team that is sticking around to make it work as an incentive. The new $ dilutes the old $, and to get new employees, additional shares are issued, further diluting the old ones.
For such a rebirth, it's not clear - how much should some person who helped recruit a failing team + 1 year of dev be diluted? For people sticking around and the new $, how much should they be incentivized to stay and put in new $, and what % should go to the former 1-year employee doing nothing? That's the pre-money valuation decision.
Does the percentage really matter? You own X number of shares at Y value, so X*Y=$Z.
Doesn’t matter if it’s 20% of the overall issued shares or 0.2%.
If you’re not in a position to buy more shares when they are issued your percentage goes down but, if the new shares are issued at a greater value than what you got your shares for then you have more $Z.
I’d say you’re in a good position. If the company dies you didn’t waste any more money on the down round. If it has a good liquidation event, I’d talk to an attorney because I’m sure you’ve got a case.
Anti-dilution clause, look it up, and next time get someone experienced you can trust involved in reviewing/drafting the contracts.
People participating as principals in startups should know this, but it's useful to have a reminder like this every so often.
@dang can we change this to a link to the original source?
https://www.reddit.com/r/Entrepreneur/comments/1asosph/i_end...
Ignoring the fact, that 15/1100 shares are ~1.36% so in your case they had to add roughly a 100x the current shares, not 10x like in your example. This already reads like the company was not doing well at that point.
Side note: If it wasn't a down round, measured from your entry event, your shares gross value still went up.
In general: If the company needs 100k in cash, and all shareholders add cash relative to their share in the company, there is no dilution, cash is added, all is good. If some or all of the current shareholders can't add cash relative to their shares, you need an external investor, that investor has to "get shares from somewhere". If the investor would buy them from the current shareholders directly, there would be no new money in the company, the money would go to the shareholders, that is not what we want here. So new shares are created and only shareholders that do not do a pro rata investment dilute their shares relative to their current share, and maybe a partial pro rata investment, to make up for these new shares, which is fair. Without a down round, valued individually for each entry event of the current shareholders, nobody loses any money here.
I do not understand why you are upset. Am I missing smth?
> They basically decided the company was near worthless valuation pre-money.
That may well have been true. If the company was out of reserves/revenue/sales/contracts and about to end without new investment, then it may have had little value, and it makes sense for any new investment to work from the current value of the company.
Can't say if it was fair in this case, but it could have been. It may even have worked out to your benefit. Without the investment you may have ended up with 15% of $0, rather than 0.15% of something.
Or not, but let's say it was. In that case this was fair.
At any point a company takes on investment, it makes sense to do so based on the current value of the company.
Suppose a start-up reaches a point where it's out of money to continue, doesn't have cash flow, and can't find additional investors. At that point the company is nearly dead and may be worth very little. The people remaining may still believe in the company and, if they are able, may be able to keep it going with investment from their own pockets.
I've posted this many times regarding startups.
"Why didn't I get any money from my startup? - A guide to Liquidation Preferences and Cap Tables"
https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_...
This post has a lot of numbers and rounds of funding showing the dilution. It is detailed but the math is very easy to follow.
I've worked at 2 startups. Both "failed" but not because of dilution but bad decisions by the executive team. My shares were supposed to be worth $500K to $2M but I ended up losing about $100 because of some tax stuff.
Maybe someone can explain this to me....
If the company was worth zero before the new round of investment, then surely the investors would not put any money into it?
So, if on the other hand it was worth something, then it's worth what people are willing to pay for it. In this case they valued the company at 1000 shares * 10K, or 10 MM. So OP should receive 15% of that.
An alternate case might be that the new valuation anticipated future profits and so was 100 MM, but since realizing such profits requires further investment that OP cannot make, their share is restricted to 15% of 10 MM, rather than 15% of 100 MM.
But in no case does it make sense to value the company before recapitalization at near-zero.
The startup is still a fledgling and you have to keep contributing either work or capital. You didn’t want to continue contributing work, and you lacked the capital, so your ownership was diluted so the startup could survive.
The company could have been incorporated in such a way that it would have prevented this.
Always make sure you get your own lawyer whose goal is to maintain your interests to review any paperwork of this nature.
Older person perspective: I have gotten (and sometimes been able to sell!) equity in five companies in my lifetime. It's the main part of my wealth, but its surprising how much real estate and slow and steady investing can get you over time if you have a good income.
I tell my kids, always try to get equity or ownership rights over anything you do, when you can.
However, these things have gotten so much more complicated in my life time and frankly much more deceptive and hostile to employees who don't have a finance degree. And sometimes it helps to have a finance degree and cash to kick in. (Rich like the OP says.)
As an example: The first salaried job I ever had (19), at a completely boring company (I did their IT) they let you put a % of your paycheck in a thing called an ESOP. I put a little in, forgot about. About ten years later the company was sold and they tracked me down to give me a nice check. One class of stock, no RSUs, if the CEO made money I made money. The last start up I worked at: they had an incredible number of rounds, not all classes of stock were the same, and RSUs. It actually worked out well for me. But I can see how you can use the dream of a big pay out and then pull the rug out in indecipherable ways.
It doesn’t matter what pct of equity you were given until the company is successful. I’m very honest with potential founding members of my startup. I can offer 2%-5% for certain roles, but if we fail, you’re not getting anything. And if you walk away, you’re essentially giving that equity back.
This is a long post about not understand startups and funding and has little to do with VCs.
Sounds like a 'pay to play' down-round.
It feels like you had 15% before the round but the company was probably underwater, and as a common share holder that equity was probably worth nothing.
A 10 year old hardware startup burning cash in this funding environment is going to raise on pretty poor terms if they can raise at all.
99% dilution does seems super high for a down round though, even with ratchets.
I've heard startup attorneys call this a "cram down - pull through". You cram down the cap table and then some of the old equity holders are included in the new allocation, either through more investment or performance incentives.
It is fairly common, and legitimate for a struggling company. There are legal remedies for improper valuation, but YMMV.
> The trick was the pre-money valuation was decided by the “internal round” participants. They basically decided the company was near worthless valuation pre-money. This then meant you owned 15% of nearly nothing.
And if that pre-money valuation is very wrong you can sue them for fraud. Judges won't take kindly to that sort of maneuver.
Doesn't matter if it's an internal or external round. The same can happen either way, just you call it dilution if it's external.
I don't think this can be defended against... You just need to make sure that if 50+% of the shareholders ever club together to make any decision, that your interests are on the majority side.
What's the company worth now? I once passed on a similar funding round at a startup that I had left. The investors in that round lost ~80% of their additional capital.
How does the story end? Is the company worth anything today?
> "both the founders and early investors lost nearly all their shares. (99% of it)"
I understand from this sentence that the company was in such an horrible financial situation that even the other people who were on the same situation as you agreed that it was better to raise debt on horrible terms rather than to bankrupt the company.
What was the status of the company before ?
It could have "simply" just been desperate that everybody agrees to be diluted.
The other possibility is that, if you were only 2 shareholders, that the other guy, created an artificial funding round, essentially diluting you (eventually potentially as a Breach of Fiduciary Duty).
The key is to understand what is his position now, if he actually lost or not.
more discussion at the reddit post
https://www.reddit.com/r/Entrepreneur/comments/1asosph/i_end...
15% isn't much in something not worth much... I think we're missing a lot of info here...
This reads like an LLM fever dream. A huge old man touched your shoulder? From the best "luxury area"? His "idea around hardware" was compelling?
The inclusion of generic/non-essential/irrelevant details and exclusion of anything remotely specific/unique/relevant makes this a very bizarre anecdote to consider.
Every time I hear about diluted shares I can't help but think of Eduardo Saverin.
You can always sue them, this is how the Facebook co founder became a billionaire
Now you know to be like me: My company is worth $0 but at least I own it!
I mean, this is how Saverin lost almost all of his stake in Facebook and then regained some of it in a lawsuit. At least if you believe the movie! :)
Are the maths correct? 15% Ă— 1000 Ă— 10k is not 150k.
The definition of capitalism is an economic system of relations that prioritizes the right to exercise existing capital to accumulate more of it, above anything else. That's why it's called capitalism.
Again, louder for the folks at home:
VC's rhyme with feces, and compare for precisely the same reasons!
You were an employee to them, just another code monkey.
"He's wired in."
TL;DR: Get good legal advice when co-founding a company. Especially when a VC is involved. And be aware that rich people will always have better legal advice (and options) than you will ever be able to afford.
Buddy got the Saverin treatment/Zuck’d
https://youtube.com/watch?v=-Osi_8_VAow
Except there was no settlement
I'm a bit curious here, since it feels like some information is missing.
You left this company in 2016, so by now, you know the outcome. You were there for under 2 years, so you only vested half. Based on my Googling, nothing physical was released and the company barely had a footprint. There's a patent (from when you would have been there), but neither you nor the "big rich man" are on it. It's also based in Oslo, which feels important to note.
I can't put my finger on it, but something feels very off here. I do agree the Reddit comments were quite inept, but at the same time, the conclusion doesn't resonate with me.
I think the real conclusion should be: A lot of startups are somewhere between risky and a straight-up scam, and very few are the next Google. If you're going to join a startup, YOU need to make sure it's the right one. If you don't have money, time is your most valuable asset, and you should be incredibly thoughtful about how you invest it.