Private Equity Experience

The Dilution Dilemma: Navigating the World of Equity Funding

• Emily Sander • Season 1 • Episode 14

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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 dilution.

🔗 Essential Links

On-Ramp to Exit: Navigating Five Key Steps to Exiting Your Privately Held Business

The Exit Strategy Playbook by Adam Coffey

🚨 Conclusion: Managing Dilution for Optimal Outcomes

Risk Management: Understand the risks of each funding round and its impact on ownership.

Exit Strategy: Plan for the future with a clear exit strategy that balances growth and control.


Join us next time on the Private Equity Experience Podcast for more insightful discus

Who We Are

If we haven’t met before—Hi! We’re a team of professionals who’ve worked together at multiple companies, seen private equity from all sides, and are here to share what we’ve learned to help you succeed. Ed Barton brings decades of tax and financial strategy experience; Rory Liebhart is a finance and M&A pro with a track record of high-growth exits; and Emily Sander is a former Chief of Staff, multi-time author, podcast host, and founder of Next Level Coaching, helping leaders and organizations accelerate their growth.


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.

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.

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.

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.

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.

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.

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,

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.