How startup stock options work, from the job offer to the day they pay
Dilution: why your part of a startup shrinks at every funding round
When a startup takes money from an investor, your part of the company gets smaller. Nobody takes a single share from you. So where does your part go?
-
1
Your 50,000 options are 0.5% of the company. To grow, the app needs money it does not earn yet, for servers and for more people. A seed investor offers $2 million, and he wants shares in return.
-
2
Nobody gives up a single share. The company makes 2.5 million new shares and sells them to him. Selling new shares for money like this is a funding round, and a first one is often called the seed round.
-
3
Everyone keeps the shares they had, but the company now has 12.5 million in all. Each share is a smaller part of it, so Miva and Rono go from 45% to 36% each.
-
4
Your 50,000 did not move either, and they went from 0.5% to 0.4%. When new shares make your part smaller like this, it is called dilution, and it comes back with every round.
-
5
So you feel a little poorer. Miva lost a fifth of her part this week, yet she looks happier than ever.
-
Quick check
Another company, another round.
Show the answer
Still 40,000. Out of 5 million shares, that is 0.8%.
-
Go further
Two names for when you read the news about a startup.