Can the founders/investors could dilute your shares at will?<p>I understand that all shares gets diluted during investment rounds, but what I'm asking is: could your shares be singled out and diluted to nothing if the founders/investors wanted to do so?
It can be done. For example majority shareholder can get a loan from the company, then make company issue new shares and buy new shares using funding from that loan. Cash doesn't even have to leave company bank account, it can be done as an accounting operation.<p>It is one of the examples of shareholder oppression and it is illegal.<p>There are laws protecting minority shareholders but you would have to take the case to court in order to protect your rights. It might not be worth if you are defending small stake.
Typically, it's expected that as a company raises more money, it will probably create more shares in the process. Even though your percentage of equity goes down, over time the company should be worth more money (hopefully).<p>0.2% of an $80M company is better than 1% of a $1M company.
They can and they do. Here are some ways:<p>1. Management makes a share issuance, diluting all existing shareholders by X%. Management then turns around and distributes shares amongst themselves. Something like this can happen if management have majority control and can get approval from their VCs/preferred shareholders (who have reserved matters that can block share issuances). Often, the VC can work with management to get something like this done.<p>(A more complicated version of this happened with the Zuckerberg/Saverin saga).<p>2. An option pool--say 10%--is issued as part of an investment round. This dilutes all shareholders by 10%. The Board then distributes the option pool to key management. There's nothing a minority shareholder can do.
There's no guarantee. Anyone with a stake, including early investors, faces the same issue. At my last company I thought I got an ok deal on signing but after a couple of pivots and acquiring a smaller company my original stake became increasingly small. I got decent follow-on options but the 4 year clock starts over for each one.
If your question is, can the founder maliciously single you out and dilute all your shares to zero because he hates you?<p>That would be illegal, and you could probably sue in that case.<p>If your question is, is it safe to do a business venture with people you don't trust, my answer is no don't do that. There are many ways founders/investors could make you unhappy if they wanted to.
Hopefully, the company will only take additional money if it can be used to make everybody's stake more valuable. So even though you have a smaller percentage of the pie, it will be a bigger pie and you'll get more pie.<p>Of course, the best laid plans gang aft aglay.
dilute all shares down to nothing, give new shares only to new investors and founders.<p>wasn't that what facebook did? and isn't this exactly what restricted share is for?
Why would you not expect to get diluted? If you are very lucky you might get offered the same terms as new investors. But why should you expect to get for free what others had to pay for? If you want this, try to negotiate something as part of your compensation but it would be very, very unusual. Good luck!