Private Equity Experience

The Dilution Dilemma: Navigating the World of Equity Funding

• Emily Sander • Season 1 • Episode 14

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0:00 | 31:14

Introduction to Equity Dilution and Its Impact on Investors

Equity Dilution Definition: Occurs when a company issues new shares to raise capital, leading to a decrease in the ownership percentage of existing shareholders.

Founder's Perspective: Founders often face the decision of whether to retain complete control over their company or raise capital by accepting dilution, which can significantly impact their future earnings and control.

Key Stakeholders: Includes founders, employees, and investors who are all affected by dilution.

💡 Understanding the Mechanics of Dilution

Cap Table Management: A cap table tracks ownership percentages. New funding rounds can disrupt the cap table, reducing existing stakeholders' ownership.

Employee Stock Options: Commonly part of compensation packages in growing companies, often subject to dilution effects.

Investor Leverage: Investors with high demand for a company's stock can negotiate for favorable terms, minimizing dilution for founders.

🌟 Key Strategies to Minimize Dilution

Bootstrapping: Funding the business without external capital to avoid giving up ownership.

Strategic Capital Raises: Raising funds when the company is performing well to leverage maximum valuation.

Structured Shares: Implementing classes of shares (e.g., with voting rights) to maintain control.

🎯 Why Timing Matters

Critical Path Investments: Companies often raise capital in dire situations, leading to unfavorable terms for founders.

Market Dynamics: A company's performance significantly influences its negotiating power during fundraising rounds.

🔄 Balancing Control and Growth

Founder Autonomy: Utilizing founder shares and supermajority voting rights to maintain control even with minority ownership.

Employee Retention: Maintaining an adequate employee stock pool to attract and retain talent without excessive dilution.

🗨️ Expert Insights from Rory and Ed

Rory Liebhart: Highlights the importance of legal and financial advisors in navigating complex cap tables and negotiations.

Ed Barton: Emphasizes the strategic use of multiple funding rounds to enhance valuation and minimize dilu

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Who Are We?

Three insiders. One mic. All things private equity — explained. Hi 👋 We’re Ed, Rory, and Emily — a CEO, a CFO, and a Chief of Staff — here to demystify the world of private equity. Between us, we’ve sat in the founder’s chair, run PE‑backed companies, and worked on the deal side, so we know the wins, the pitfalls, and the jargon (and we’ll explain it).

Through the Private Equity Experience Podcast, our book On‑Ramp to Exit, and a library of free tools and templates, we share real‑world stories, practical strategies, and insider insights to help you navigate every stage of the PE journey — whether you’re leading a portfolio company, joining a deal team, considering PE, or just PE‑curious.

🔗Connect with Ed

🔗Connect with Emily

🔗Connect with Rory

emily-sander_1_05-29-2025_150419

Quiet and distant is always how I describe Ed Barton. My goodness, definitely not Foghorn. And what is the opposite of distant,

ed-barton---it-_1_05-29-2025_150418

Foghorn.

Kickoff Question: Strong Shot or Watered Down Cocktail?

emily-sander_1_05-29-2025_150419

nearby engaged. Alright, here we go. Locked in. We are locked in and ready to go on the Private Equity Experience podcast and

squadcaster-a956_1_05-29-2025_150418

are.

emily-sander_1_05-29-2025_150419

our kickoff question. I'm gonna go. I'm gonna go to Rory. Rory, when you used to drink

squadcaster-a956_1_05-29-2025_150418

Hmm.

emily-sander_1_05-29-2025_150419

at least more than you do now, would you go for the strong shot that burns or a watered down cocktail that lasts all night?

ed-barton---it-_1_05-29-2025_150418

Oh.

squadcaster-a956_1_05-29-2025_150418

Oh, I think you know the answer to that. I'd go, I'd go strong and. Hard hitting quickly, generally speaking. Uh, yes. Yeah, very much a used to be a whiskey guy. Um, so, you know, the higher the proof, the better back in the day. Um, Yeah, definitely

emily-sander_1_05-29-2025_150419

Rory may or may not have drank to the point of like lights out

squadcaster-a956_1_05-29-2025_150418

yeah,

emily-sander_1_05-29-2025_150419

nights. Yeah.

squadcaster-a956_1_05-29-2025_150418

times. More than a few times. Yeah,

emily-sander_1_05-29-2025_150419

Mr. Barton,

squadcaster-a956_1_05-29-2025_150418

and had a little more constitution. Now that would, that'd be, that'd be a real problem for

emily-sander_1_05-29-2025_150419

would you be down for the count for like days if you did that?

squadcaster-a956_1_05-29-2025_150418

Yeah. Yes. The hangover effect is really a deterrent for me, uh, in so

emily-sander_1_05-29-2025_150419

Yeah.

squadcaster-a956_1_05-29-2025_150418

of, of consuming alcohol. Yeah.

emily-sander_1_05-29-2025_150419

Edward Barton. Is there any car fluid that actually gets better when you dilute it, or is it always a bad idea or a last resort situation?

squadcaster-a956_1_05-29-2025_150418

my gosh.

ed-barton---it-_1_05-29-2025_150418

any car fluid that gets blinker fluid gets better when you dilute

emily-sander_1_05-29-2025_150419

Oh.

squadcaster-a956_1_05-29-2025_150418

I didn't know there was such a

emily-sander_1_05-29-2025_150419

Me neither are you? Are you making this up?

squadcaster-a956_1_05-29-2025_150418

actually.

emily-sander_1_05-29-2025_150419

God bless, blinker fluid. What the hell?

squadcaster-a956_1_05-29-2025_150418

Yeah.

emily-sander_1_05-29-2025_150419

All right.

squadcaster-a956_1_05-29-2025_150418

that's that's classic.

ed-barton---it-_1_05-29-2025_150418

Nothing gets better diluted, whether that's

squadcaster-a956_1_05-29-2025_150418

segue.

ed-barton---it-_1_05-29-2025_150418

or

squadcaster-a956_1_05-29-2025_150418

Hmm.

ed-barton---it-_1_05-29-2025_150418

car fluid or your cap

emily-sander_1_05-29-2025_150419

Okay.

Investment Dilution Basics

squadcaster-a956_1_05-29-2025_150418

cap tables. Yeah, exactly

emily-sander_1_05-29-2025_150419

into our topic for today, which, which is investment dilution. Let's start with like a basic, basic definition and example. So company issue shares their initial round of shares, subsequently company issues, additional round of shares. Therefore, if you own a certain amount of shares, you now own a smaller percentage of the company. Is that a working definition?

squadcaster-a956_1_05-29-2025_150418

I mean in, that exact way of stating it. That's right. Yeah. If you have the same number of shares and the company issues more shares to other people, then you own less of the company by virtue of having proportionally less. Piece of the pie. That's the way to think about it

emily-sander_1_05-29-2025_150419

Okay.

squadcaster-a956_1_05-29-2025_150418

you know, if, if you, if you have a bigger slice of the pie, um, and more pie is somehow created and given away than you have less than you had before. Yeah. And that's generally not a good thing. I mean, you know, I'd say categorically speaking, dilution isn't good generally.

ed-barton---it-_1_05-29-2025_150418

Yeah, there's a, the argument is always made that it's like, well, you gotta smaller piece of a bigger

squadcaster-a956_1_05-29-2025_150418

Exactly. Yeah.

ed-barton---it-_1_05-29-2025_150418

that bigger pie might, and that smaller piece might not be as, might not be the right

squadcaster-a956_1_05-29-2025_150418

Right.

ed-barton---it-_1_05-29-2025_150418

split for you. You might be hungry.

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

With that split.

squadcaster-a956_1_05-29-2025_150418

Yeah.

emily-sander_1_05-29-2025_150419

So we alluded to this in our last podcast episode. We were talking about the cap table and debt and equity and mezzanine and all that good stuff. And we were kind of going through the se, the sequence of this stuff, and you two were both mentioning it. And at this point you get diluted and at this point the original investors would get diluted. And so we thought this would be a good topic, but where does this come into play in real life for investors, for pe, for VC funds? We've kind of talked about a whole bunch of these things.

squadcaster-a956_1_05-29-2025_150418

well, I'll tell you where it doesn't come into play, which is a really good place to be if you can manage your way through it is to bootstrap your business so that you're not giving away. Pieces of your company to take on outside capital. Like so your business, for example, Emily, you haven't taken on other investors, so you own all of your business, therefore, you're not experiencing any dilution, you know, and presumably never will, which is the way to be. And there are a lot of examples of that out there where big companies that you hear about today been around for a long time, they've just never taken on outside capital because you know, they've had. You know, growth and profitability out the gate and they'd never had to do it. And I think really that comes down to the choice to take on external capital, take on other business partners, um, raise more money, you know, equity specifically. Um. That's where you have to decide whether, you know it's worth it to be diluted or give up of what you've built and, you know, give that away forever basically. Unless you buy it back someday. But, you know,

emily-sander_1_05-29-2025_150419

When, when would you have to make that decision?

squadcaster-a956_1_05-29-2025_150418

well, a lot of companies look at it when they're close to running outta capital. Um, that's, that's usually a place where you pretty much are, your hand is kind of forced. say, darn it, you know, I'd love to bootstrap this thing, but I can't. And so I need to go ahead and take on an investor, and I know I'm gonna have to give up a pound of flesh for that

ed-barton---it-_1_05-29-2025_150418

Yeah,

squadcaster-a956_1_05-29-2025_150418

Um,

ed-barton---it-_1_05-29-2025_150418

the

squadcaster-a956_1_05-29-2025_150418

yeah,

ed-barton---it-_1_05-29-2025_150418

to get money is when you need it.

squadcaster-a956_1_05-29-2025_150418

exactly right. That is exactly right.

ed-barton---it-_1_05-29-2025_150418

worst time to get money is when you need it,

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

you lose your negotiating leverage.

squadcaster-a956_1_05-29-2025_150418

Yep.

ed-barton---it-_1_05-29-2025_150418

dilution in some cases. I, I mean, I agree with Rory in, in a general sense in that if you can bootstrap your business to the point where you can sell it and do that without taking external money, more power to you, and that's, that's gonna be your best choice. Um. achieve, if that's your strategy and that's what the goal you want to achieve. Most businesses that, you know, if you look at a Facebook or you look at, you know, Mo, even most of your public businesses, they haven't been bootstrapped. They've had folks

squadcaster-a956_1_05-29-2025_150418

Right.

ed-barton---it-_1_05-29-2025_150418

and each round that folks come in, the, the leverage changes depending on how successful the business

squadcaster-a956_1_05-29-2025_150418

Mm-hmm.

ed-barton---it-_1_05-29-2025_150418

take, you could go, if you have a really successful business, you can go out and raise capital

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

and actually it's gonna cost the investor a lot. And so the dilution is gonna be less. Really, the, the goal is always go out for capital when you don't need

squadcaster-a956_1_05-29-2025_150418

Mm-hmm.

ed-barton---it-_1_05-29-2025_150418

always have an overperforming business so that you can have a beauty contest and a competitive environment for your capital round. And if you're not, if you're in out there like hat in hand begging for, you know, begging for your capital, that's when you're gonna get the, that's when the dilution is

squadcaster-a956_1_05-29-2025_150418

Exactly.

ed-barton---it-_1_05-29-2025_150418

that cheap, that cheap cocktail. You talked about really bad. I.

emily-sander_1_05-29-2025_150419

What did you mean? What did you mean? When the investor has to pay, pay, pay for it.

squadcaster-a956_1_05-29-2025_150418

Well, it just means if you have, uh, we'll use a real example here, Amazon, um. You know, Jeff Bezos is largely thought of as pretty savvy, savvy business person because whenever he had taken on money, new money, external capital, like what Ed's saying it was when there was a lot of demand to be part of that growth journey. So when an investor is trying to get into like a hot stock or something like that, you end up paying a premium for that. And same thing goes in private businesses you're issuing private classes of shares, which is to say. If you have a lot of demand lined up, you can dictate the terms to the investors for which they come in. So you might give up a very small slice of your company to take on a lot of money.

emily-sander_1_05-29-2025_150419

Okay.

squadcaster-a956_1_05-29-2025_150418

flip side, the the opposite of that, what we're talking about, where bad if you need the capital and the investor knows you need the capital and that they're the critical path to that, you might have to give up a lot of your company. to get the kind of capital you need to keep growing the business. Um, and not only beyond the financial aspects of owning less of your company, of course there's also control aspects. You know, you want to, I mean, as a founder, you know, management team, what have you, uh, you know, maintaining as much of a control position as possible. And that's generally based on. The proportion of the company that you own, you get to be more of the decision maker. You get to be more control of the board seats, things like that. Mark Zuckerberg's another example of somebody that's managed to do that very well over time, and that's a function of what we just talked about was, you know, that's a company that everybody wanted to be part of and so you know, they get a pick and choose. they bring in and dictate the terms to the investors, and probably most of those investors are pretty happy right now if they came in early on that business, no matter what the terms were that they had to sign up for.

emily-sander_1_05-29-2025_150419

If a founder can, can a founder do anything at the beginning to prevent their shares from being diluted?

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

Um, yeah, and I think one of the things Rory talked about with, with Zuckerberg was they had multiple classes of

squadcaster-a956_1_05-29-2025_150418

There you go. Yep.

ed-barton---it-_1_05-29-2025_150418

so the, there's founder shares

squadcaster-a956_1_05-29-2025_150418

Yep.

ed-barton---it-_1_05-29-2025_150418

like a. One share gets 40 votes,

squadcaster-a956_1_05-29-2025_150418

Right.

ed-barton---it-_1_05-29-2025_150418

and then there's the investor shares where one share gets one vote.

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

And so even though the founders may have diluted themselves to 30% of the ownership, they still have a majority or a super majority of the voting interests so that they can control the board of directors, they can control the, they, they maintain that control that Rory was talking about. Now you're gonna trade. When you do that, you're gonna trade. Um, generally for value. So it's, there's gonna be a cost associated with setting some of those things up. But the key thing that a person can do or that a founder can do to actually prevent themselves from being diluted is to have an overperforming business and have a strong competitive fundraising round where you've got multiple players.'cause those multiple players will go, I want to

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

and I'm gonna value your business at a hundred million. And then the next one goes, I'm at one 10, or I'm at one 20, or I'm at one 30. And you get super majority voting interest. And so you, you drive that and that's where your investment banker also is gonna be able to kind of bring their forces to bear if they're worth their salt, to make sure you get that maximized.

squadcaster-a956_1_05-29-2025_150418

And the reason why this sort of delineation of slicing the pie into play so much with earlier stage businesses, um, rather than, let's say a private equity company coming in is, is really generally speaking when a private equity company mostly comes into the picture. I shouldn't say mostly. In, in, in a lot of cases, they're buying the entire company. So it's like the, you're, you're just basically saying, okay, I want the max value for my business and I'm gonna have a competitive process to get that max valuation. In a case like this, oftentimes earlier stage businesses are selling off minority pieces of their business, but they want to maintain as much of the pie as they can for how much they're selling, uh, how much money they're raising. They want to give up as little as possible. In the case of the private equity game, it's more like I, I already know I wanna sell a hundred percent of my company. I just want to get the max value for that.

emily-sander_1_05-29-2025_150419

Okay, so what about when a private equity company sells to another PE company? Did does the first PE company's shares get diluted?

ed-barton---it-_1_05-29-2025_150418

No, and you don't tend to see that. It tends to be a full sale, like Rory said. But where you do see that is on the venture

squadcaster-a956_1_05-29-2025_150418

Exactly. Yeah.

ed-barton---it-_1_05-29-2025_150418

have venture round a

squadcaster-a956_1_05-29-2025_150418

Mm.

ed-barton---it-_1_05-29-2025_150418

might have a smaller venture capital firm that's backed it, and then you gotta go, oh crap, we're not, oh crap. It's a good problem. We're growing so rapidly. we need to go out and raise additional rounds, and instead of going to a small venture fund, we're gonna go to Madrona, or we're gonna go to Kleiner Perkins, or we're gonna go, you know, one of the big boys.

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

those big boys are gonna come in and they're gonna dilute. folks in Round A,'cause you're getting additional money comes in so the pie gets bigger. guys go, well, I'm gonna, I'm gonna write a check for a billion dollars. But that billion dollars isn't going out to the other shareholders. In normal cases, it's going into the business. And so the businesses has a pre.

squadcaster-a956_1_05-29-2025_150418

Mm-hmm. Mm-hmm. Yep.

ed-barton---it-_1_05-29-2025_150418

And then it has a post money value, which is the value of the bigger pie, plus the opportunity cost plus the the growth opportunity that's built into that additional money. And that's where your negotiation is, is what's, what's my pre-money value, my post money value? And how much of that post money value does do the original shareholders or do the shareholders before that round because they're gonna get diluted with that in that post money scenario.

squadcaster-a956_1_05-29-2025_150418

Yep.

emily-sander_1_05-29-2025_150419

Yes. Okay. So it might happen more commonly in the VC rounds, but we did mention last time that one of the exit strategies is to sell to a PE firm, and that's in our book. So in those situation, is it like they're just buying the whole thing again, so it doesn't really matter?

squadcaster-a956_1_05-29-2025_150418

exactly.

ed-barton---it-_1_05-29-2025_150418

the, the original P firm. Unless they do a sidecar or something along those lines, which again, is, is more like a VC where the original fund is going. We still want to, we still want to come in, but we want additional equity. They may not be in a position where that fund has additional equity to contribute. I. You know, so that that private equity fund is kind of tapped out or they're not making new investments, they're returning capital to shareholders. They want to, or to, to limited partners. They want to be able to make an additional, or that business needs additional capital. They may have a second private equity firm come in at that point, you're, you and it's primary capital going into the business as opposed to buying out

squadcaster-a956_1_05-29-2025_150418

Mm-hmm.

ed-barton---it-_1_05-29-2025_150418

buying off. At that point you may have, um, some dilution, but that's a, that's a not a extraordinarily common transaction.

Horror Stories of Dilution

emily-sander_1_05-29-2025_150419

Okay. Are there like some, there's gotta be some absolute horror stories out there of people who just got washed out and they didn't like, didn't do anything wrong per se. They just didn't know how it worked or they just.

ed-barton---it-_1_05-29-2025_150418

I'll give you

squadcaster-a956_1_05-29-2025_150418

Yeah, absolutely.

ed-barton---it-_1_05-29-2025_150418

here's the worst horror story. You have folks that get diluted from control to non-control, they've got 49% of the business and they control nothing and they can't get their money out. So, so they end up going, oh, well I'm going to, so I'm a founder, I've built a really nice business. It might be doing, you know, seven, 7 million, 8 million of ebitda. gonna come in and I know I need some additional equity, so I'm gonna come in and you raise a$50 million of primary equity to come into the business, in return, you're giving up 51% or 60% of the business to do that. then six months into it. The VC goes, you're not the right executive for us. We want somebody different. You're going to, you know, you're out. Nothing you could do except your entire net worth is stuck in that

squadcaster-a956_1_05-29-2025_150418

Tied up in that business.

ed-barton---it-_1_05-29-2025_150418

likely stuck with a board seat that doesn't have any control, makes you a fiduciary of the business. So you can't compete, you can't, I mean, you're, you, you could end up like in a real, that's the horror

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

There's a horror story where like, my business is distressed. And I dilute, it gets, and I get diluted down to zero

squadcaster-a956_1_05-29-2025_150418

Right.

ed-barton---it-_1_05-29-2025_150418

because of caps stack. You know, they, they throw on a preferred or they throw on, you

emily-sander_1_05-29-2025_150419

Down to zero though.

ed-barton---it-_1_05-29-2025_150418

to zero, effectively, economically down to zero. But the, that's almost better than to be stuck at like 49% and not have any control and have all your money tied up and you can't compete and you're stuck kind of sitting on the sidelines. That, that to me is like. That's, that's horrible.

squadcaster-a956_1_05-29-2025_150418

Yeah.

Understanding Capital Stack and Dilution

ed-barton---it-_1_05-29-2025_150418

And I've seen that. I've also seen folks diluted down to zero because the, know, they basically were in distress and they,

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

said, yeah, we need additional private, or we need additional capital. And they said, look, put additional capital and it's gonna be, you know, preferred. So that's good.

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

you may, you can have your comment all you want. You know, it kind of comes back to the capital stack discussions we talk about in, in, uh. In our, in our book or on a few of these other podcasts where they may have, from a common stock perspective, they may not experience dilution at all. They may hold all the common stock still, economically

squadcaster-a956_1_05-29-2025_150418

but may never see of day. Yeah.

The Impact of Losing Control

emily-sander_1_05-29-2025_150419

So there's kind of like, there's different levels to think about this on. It's not just the financial, although that's important to a lot of people. There's, you mentioned like the voting rights. So the control, like you have influence, you have a say, you can make decisions versus like, I may be the founder of the company, but now I'm like a bound pigeon. I can't do anything because I.

squadcaster-a956_1_05-29-2025_150418

It says your baby, that you're now basically and watching somebody else raise that, baby into a child or, or, you know. Taking it. I, I mean, a lot of times what I see with founders is when that happens and they give up control, it's like the business goes a completely different direction or something like that. And that, that is the hardest thing for them to deal with because they conceived of it. They, you know, got it to a certain point and now they can really do nothing more about it because of the way they've been structured out of the business.

emily-sander_1_05-29-2025_150419

Yeah.

squadcaster-a956_1_05-29-2025_150418

alas, there are ways in which you can avoid being diluted. Sometimes it's costly. Of course, you know, you can. Have preemptive rights to contribute more capital and later around so that you can keep a proportional share. Now, easy for somebody to say, but if you're not a, you know, billionaire or something like that already, and you know, you're at, you're raising another large funding around, that's hard to kind of keep up with. So I, you know, that's, there's levels of practicality to

emily-sander_1_05-29-2025_150419

But how would that work? Just in theory?

squadcaster-a956_1_05-29-2025_150418

Well, let's say, you know, you, you have a, I don't know, 50% position in your business today. And you go, you need to raise another$50 million. That would mean that you would need to put up the next 25 to keep that position basically to, to maintain 50% ownership. So that's real simple math, but but you can imagine with big numbers, that means you actually have to come up with a lot of capital yourself.

ed-barton---it-_1_05-29-2025_150418

Yeah,

emily-sander_1_05-29-2025_150419

Is, is there any clause or any preemptive thing you can do where I get to retain my percentage and then I get, I, I can, I have to buy it, but at like a cheaper price, like I won't have.

ed-barton---it-_1_05-29-2025_150418

negotiable.

squadcaster-a956_1_05-29-2025_150418

negotiable. Yeah, it's all been done.

ed-barton---it-_1_05-29-2025_150418

are premised on your leverage and your leverage

squadcaster-a956_1_05-29-2025_150418

Leverage.

ed-barton---it-_1_05-29-2025_150418

upon the, the condition of the business and how much you need the capital and how much competition

emily-sander_1_05-29-2025_150419

S

ed-barton---it-_1_05-29-2025_150418

to

emily-sander_1_05-29-2025_150419

So in the scenario where you're doing well and like investors want to be a part of it, and you're like, okay, you, you can pay for it. You could set up like, okay, I'm gonna let you in, but also just know that I'm gonna retain my voting rights. I'm gonna retain my shared position, and I'm gonna give myself the option to keep that share position at like a lower cost per share if it gets to that.

ed-barton---it-_1_05-29-2025_150418

you'd better be performing like, you know, fricking Mikhail Nik off, you know, on, because you ain't gonna be getting that kind of deal on, on a typical, even an atypical, uh, that's, that would be exceptional. That would be like. Well once a once a decade type of type of deal You just talked

emily-sander_1_05-29-2025_150419

Okay. Ed Ed's saying funny names, but do we have like some success stories of like how to do dilution well, or like, Hey, this is like if you do dilution, this is how you wanna do it.

squadcaster-a956_1_05-29-2025_150418

Um, yeah, I mean, I think there's. sorts of success stories. I, I guess the couple that, you know, we've talked about a little bit earlier, you know, Amazon and Facebook, and that comes down to those businesses having all the leverage. And so their founder owners basically maintain control and insane amounts of wealth through the, through the process of taking all their money. Uh, the other thing I think it's worth talking about is this isn't just applied to folks that are founders or, you know,

emily-sander_1_05-29-2025_150419

Hmm.

Employee Stock Options and Dilution

squadcaster-a956_1_05-29-2025_150418

initial investments. From a capital standpoint also, you know, there's generally, with a lot of these earlier stage businesses, there's employee pools of stock. So one of the things that if you're working for one of these and you get grants and stuff up front, you know, you'd have to be thinking down the road of to say, okay, how many other funding rounds were there gonna be in this thing before the exit? Which is what everybody's kind of building for. you have to be careful and you maybe try to ensure that you, you know, the employee pool itself doesn't get diluted, right? Let's say an employee pool represents 15% of the stock at a certain point of time. For you as an employee that's got a vested interest in this, this stuff, literally, literally vesting interest. You wanna make sure that that employee pool stays at that 15% or greater if you, again, if you have leverage. Maybe it becomes 20, who knows? But you, what you don't want to see is it become down to five. So, you know, your Max grant is gonna be, you know, presumably less and less, and you're gonna be working more and more and harder and harder the, the further this thing goes. So that's something to really of if you, if you base your future outcome on stock-based compensation.

emily-sander_1_05-29-2025_150419

That's a really good point.'cause then your employees could just get totally just discouraged and like, all right, well my, you know, my retirement plan.

squadcaster-a956_1_05-29-2025_150418

employees are what makes companies happen and makes, makes things go for a business. So I, you know, I don't, I, it's fairly rare where I feel like the, you know, even, you know, changing of the guard bringing in investors, they don't want to see the employees, just like you say, totally pissed, you know? So there's usually a, a balance to strike there, but it is just something to be mindful of

ed-barton---it-_1_05-29-2025_150418

Yeah,

squadcaster-a956_1_05-29-2025_150418

your, your own pot of things shrinking.

ed-barton---it-_1_05-29-2025_150418

a lot of times what I've seen is you have the. The option pool

squadcaster-a956_1_05-29-2025_150418

Yeah,

ed-barton---it-_1_05-29-2025_150418

stay at 10%.

squadcaster-a956_1_05-29-2025_150418

yeah,

ed-barton---it-_1_05-29-2025_150418

before, but it's, and it's 10% now. So you have new options.

squadcaster-a956_1_05-29-2025_150418

yeah.

ed-barton---it-_1_05-29-2025_150418

options are issued, but they're issued at the new valuation so that, that

squadcaster-a956_1_05-29-2025_150418

That's right. Yep. That's right.

ed-barton---it-_1_05-29-2025_150418

you know, kind of the ups from that point forward. So the, the original options are diluted, but they're at a lower, but they're at a lower, they're at a lower valuation. So they've got, they've still locked in that value.

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

Locked in the value.

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

see it until you leave. Um, and the exit happens, but they get, the pool stays at 10%, but all the new options are at the new higher valuation. So you've gotta earn, you've

squadcaster-a956_1_05-29-2025_150418

Yeah, it's all about timing. I'm like just chuckling to myself here, being reminded that, you know, a company I worked for at one point in time, I joined the company was really stoked.'cause I got, you know, I got options in it and stuff. But then I later learned that my strike price on my options went up like almost four to four x. What it was like the month before the company got revalued from a much lower valuation. had I started earlier, I'd get at the exit, which did happen. I would've gotten like four times my

emily-sander_1_05-29-2025_150419

no.

squadcaster-a956_1_05-29-2025_150418

But hey, say Lavie, that's how it goes. You know,

emily-sander_1_05-29-2025_150419

Timing is everything.

squadcaster-a956_1_05-29-2025_150418

days I'll end up on the right side of those deals.

emily-sander_1_05-29-2025_150419

Timing is everything in lots of areas of life. Yes.

squadcaster-a956_1_05-29-2025_150418

is. Yep.

emily-sander_1_05-29-2025_150419

Just outta curiosity, is there any way that, uh, share would get what is the opposite of diluted, concentrated? Where to actually be worth more?

squadcaster-a956_1_05-29-2025_150418

Mm,

ed-barton---it-_1_05-29-2025_150418

i I haven't seen a lot of that. You do have situations where you can have share buybacks. I mean, you see that more with public companies where if

squadcaster-a956_1_05-29-2025_150418

for sure.

ed-barton---it-_1_05-29-2025_150418

excess cash and they go, okay, we're gonna buy back some equity. Um, you can see that sometimes, I suppose in like a private equity setting where you retire preferred. So it may be convertible preferred that gets retired, and then with cash and then your common stock now that you don't have those. Conversion rights hanging out there ends up more concentrated, but it's rare because again, the who's gonna be the seller, the time where you might, you know, at the, at the concentration point. So where, where you would tend to see it is more the people leave. I mean, this is one that I have seen over and over again. So kind of on the flip side of that is you have a 10% employee pool that's all been issued, that means the other folks have a 90% interest. And then all those employees quick get fired, whatever, and

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

of the employee pool. They don't reissue the other 6%. So that means that, that,

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

that essentially concentrated, um, the balance, but it's normally not a, you know, that, that's around the margins. And that's, and that's fairly typical that you've got an employee pool that's not fully, fully out, invested.

squadcaster-a956_1_05-29-2025_150418

The point here is that it's also fungible and like over time these things, you know, move around a lot. So you just need to know what levers to watch out for and to, to think about. Um, so that you, you understand what's at stake at every point in time when you're getting a new round of funding or something like that. Structure means everything here, you know? Um, and I think like the balance of strike, right? If you're a founder perhaps, and you're thinking about whether to take on capital or not, and let's say in a scenario, you, you, you could somehow maintain your control. You just really need to think about, okay, the whole point of taking on more capital is to expand the size of the pie. Well. You know, if I expand the pie and even if my slice of the pie gets smaller, will I be better off in this scenario or not? You know, assuming you know you, you like the partner and all this other stuff, you just have to think economically and say, okay, know, does, does taking on more money lead to a overall better outcome? Even if I have less of a share of the company? And I think, you know, when people take on those rounds of funding, that's what they come to the conclusion on. It's like, yes, that is better for me. That is better for the company.

ed-barton---it-_1_05-29-2025_150418

the additional funding, the additional cash reduces the risk premium.

squadcaster-a956_1_05-29-2025_150418

There we go. There we go. we go. Risk premium.

ed-barton---it-_1_05-29-2025_150418

I

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

RIS premium in. I've been, I've been waiting.

squadcaster-a956_1_05-29-2025_150418

Gonna turn this into a drinking game.

ed-barton---it-_1_05-29-2025_150418

our, our subscribers are gonna have the risk premium drinking game every time that says risk premium,

squadcaster-a956_1_05-29-2025_150418

So true. Yeah. Yeah.

emily-sander_1_05-29-2025_150419

as you go through the rounds of funding, who is the one making the decision of whether or not to dilute the shares or not? Is it like the majority party,

squadcaster-a956_1_05-29-2025_150418

The board of directors.

emily-sander_1_05-29-2025_150419

but it's like the majority?

ed-barton---it-_1_05-29-2025_150418

effectively, but

squadcaster-a956_1_05-29-2025_150418

Yeah. Yeah.

ed-barton---it-_1_05-29-2025_150418

again, you could have a situation where the majority, the majority use a Facebook example, the majority. It could not be, could not have a majority of the board, because they don't have a majority of the votes. They've got a majority of the

squadcaster-a956_1_05-29-2025_150418

Mm-hmm.

ed-barton---it-_1_05-29-2025_150418

And so it's, it's a,

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

the board of directors makes that decision. again, the board of directors is tasked with fiduciary responsibility to, to make, you know, the company perform as, as best it can and the act in the best interest of the company, which includes the shareholders.

squadcaster-a956_1_05-29-2025_150418

Yep.

ed-barton---it-_1_05-29-2025_150418

So,

squadcaster-a956_1_05-29-2025_150418

And, and typically founder and or CEO is, you know, not only on the board, but typically the chair person of the board too. So, you know, you, you have representation at that level from the operating business as well as other investors and outside advisors.

emily-sander_1_05-29-2025_150419

But that's where, in the example we gave earlier, where founder maybe gave up the financial. Shares, but kept the majority of the voting rights, then that founder could decide, we're actually not gonna dilute this further because I'm gonna vote against that.

ed-barton---it-_1_05-29-2025_150418

Or

emily-sander_1_05-29-2025_150419

And

ed-barton---it-_1_05-29-2025_150418

gonna get certain terms,

squadcaster-a956_1_05-29-2025_150418

Yeah,

emily-sander_1_05-29-2025_150419

yeah. Okay.

ed-barton---it-_1_05-29-2025_150418

the,

Final Thoughts and Advice for Founders

emily-sander_1_05-29-2025_150419

there any other like levels to think about, there's like financial, voting rights, are there other, other kind of levers to pull.

squadcaster-a956_1_05-29-2025_150418

Well, before we do that, I think this is, I just wanted to connect this back to a really important thing. If you're a founder, it's worth not getting screwed by working with an advisor to help you think through these things. Because again, you oftentimes, you're dealing with investors that all they do every day is cap tables to their advantage. I, you know, I think some of the horror stories we could drum up have to do with founders being naive or being told something. when, you know, you look at the fine print, it's not what it seems. So, like, as we've talked about in our book, and, you know, strongly advise here is, you know, get a circle of trust around you, whether it's legal advisors or financial advisors, et cetera, that can help you navigate the complexities of captive. I'm A CFO for crying out loud and these things are complex and sometimes make my mind, you know, bend. So, it's worth the time. It's worth the money. It's worth the of mind knowing that you got somebody else looking at it with you. It has your interest at heart'cause you're paying them likely, you know? So,

emily-sander_1_05-29-2025_150419

Yes. Alright. Exit question time.

squadcaster-a956_1_05-29-2025_150418

Ooh, okay.

emily-sander_1_05-29-2025_150419

Let's do a couple, couple rounds. Lightning round here. Finish this sentence. You know, you're about to get diluted when,

squadcaster-a956_1_05-29-2025_150418

You are running outta capital and you're needing to go ask for more.

ed-barton---it-_1_05-29-2025_150418

There's an LOI on the table.

squadcaster-a956_1_05-29-2025_150418

You're right. It's that simple. Yeah. Yeah, yeah,

emily-sander_1_05-29-2025_150419

if.

squadcaster-a956_1_05-29-2025_150418

yeah. Especially if you haven't already negotiated it, but yes. Yeah.

emily-sander_1_05-29-2025_150419

If equity dilution were a dating relationship, what stage would it be in the honeymoon, the breakup, or the complicated middle?

ed-barton---it-_1_05-29-2025_150418

If, if, if equity dilution was, oh, it's a complicated middle.

squadcaster-a956_1_05-29-2025_150418

It is complicated.

ed-barton---it-_1_05-29-2025_150418

middle.

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

the, it's like the. We don't want to talk to each other part of the

squadcaster-a956_1_05-29-2025_150418

Yeah.

ed-barton---it-_1_05-29-2025_150418

but I'm stuck in it.

squadcaster-a956_1_05-29-2025_150418

Mediation. Pretty much. Yeah.

emily-sander_1_05-29-2025_150419

Gosh. All right, last one here. Dilution in three words go,

squadcaster-a956_1_05-29-2025_150418

Three words.

ed-barton---it-_1_05-29-2025_150418

managed.

squadcaster-a956_1_05-29-2025_150418

Yeah. Avoid if possible.

emily-sander_1_05-29-2025_150419

but could be good.

squadcaster-a956_1_05-29-2025_150418

forever.

emily-sander_1_05-29-2025_150419

Could be good.

squadcaster-a956_1_05-29-2025_150418

two words actually.

emily-sander_1_05-29-2025_150419

CFO can't count.

squadcaster-a956_1_05-29-2025_150418

Bootstrap forever. Damnit.

emily-sander_1_05-29-2025_150419

You can hyphenate, bootstrap, and stretch it out if you needed to. Alright.

squadcaster-a956_1_05-29-2025_150418

I'm all, I'm very familiar with, you know. Capital markets and, you know, different types of the cap table. But at the end of the day, I am just gonna say, just, just fund it all yourself if you can. Don't worry about the other stuff. Maybe take on some debt and make that efficient for yourself. But, you know,

emily-sander_1_05-29-2025_150419

Beautiful.

squadcaster-a956_1_05-29-2025_150418

fund it yourself.

emily-sander_1_05-29-2025_150419

and now we know more about dilution.

squadcaster-a956_1_05-29-2025_150418

We do. Yeah.

emily-sander_1_05-29-2025_150419

Thanks Ed. Thanks Rory. Catch you next time.

squadcaster-a956_1_05-29-2025_150418

Yeah, talk soon.

ed-barton---it-_1_05-29-2025_150418

Thank you.