> 2/ But that argument about how a new CEO should be compensated essentially puts on the table the question of whether the founder CEO is actually the best person to run the Company right now or if there is someone better suited to do that who could be recruited for a new market equity grant. It is often not in everyone’s best interests to have that conversation.
Why would it not be in everyone's best interests to have that conversation?
The CEO might not get to stay in their highly-compensated, prestigious position that they presumably worked very hard for.
The board might have to answer questions about why they didn’t start looking for a new CEO sooner.
The company might have to suffer through the trauma of switching CEOs.
All shareholders might lose some equity if a large grant is given to the new CEO. (Nearly equivalently, the company will lose a large chunk of the shares reserved for new hires, reducing its flexibility in hiring.)
Think of ownership as percents of a whole, not little pieces of paper. You can't own more than 100% of the company collectively, and the more the CEO owns the less other people will.
> Think of ownership as percents of a whole, not little pieces of paper.
Shares don’t represent a percentage of anything other than the current number of issued shares. No one should be expected to work for free. New shares should always be created whenever someone contributes labor, capital, or some other asset. If existing shareholders aren’t being continuously diluted as people make new contributions to the company then something is going seriously wrong. Just because someone got shares for a previous contribution doesn't mean you don't need to pay them for future contributions.
I mean would you expect your series A investors not to get any shares because you already gave some shares to your seed investors? It makes literally no sense.
Your options pool should be negotiated with your investors to cover your first X (e.g. 100) employees. It makes no sense for it to cover founders, nor does it make any sense for it to cover some indefinite amount of future labor.
Um, no... company shares represent a "share" of the company's value.
I think you need to understand what "dilution" means here.
Say your company has 100 shares, and is worth $1000, so each share is worth $10. You create another 100 shares. Your company now has 200 shares. But the company is still exactly the same company. It didn't just double in value, it's still worth $1000, so now each share is worth only $5. Each share got "diluted" in value.
If you, as a loyal employee of many years service, were holding 5 of these shares, then the value of that loyal service just got halved. You would be annoyed at this.
Company valuations need to go up in order to issue new shares without annoying people. Seed investors buy shares when the company is small and not worth much. When the Series A people come in, the company is much bigger and worth much more. So the new shares can be issued without annoying the existing investors because their net value remains the same (or usually goes up).
Randomly issuing new shares without an increase in company value will annoy everyone, which is why companies don't just issue new shares whenever they feel like it.
Creating shares, regardless of changes in company value, dilutes percentage ownership of previous investors. I think your definition of "dilution" isn't capturing this aspect of GP's comment.
Sure, it dilutes the percentage owned. But unless you have a down round, you have more value.
If someone has five shares at $1000 total valuation and 100 shares, they have an equity position worth $50 and 5%. If the company grows and issues another 100 shares but the price paid by an investor for those shares is $5000, that means that each share (ignoring preferred share premium, which is ok in the abstract but shouldn't be ignored in reality) is worth $50. The five share owner owns less of the company but what he or she owns is worth more ($250 vs $50, but 2.5% vs 5%).
This is exactly how each round of investment works. The board creates new shares for each round. Previous investors wanting to maintain their percentage ownership must invest again.
A new investor brings money into the business to "purchase" those newly printed shares, so diluting previous investors' percentage of ownership doesn't necessarily change their material position unless there are more strings attached to the investment.
For example, if an enterprise was worth $100M before investment and then there's a new investor that brings in $100M, the new investor owns 50% of a $200M pie and the previous investors combine to own 50% of $200M as opposed to 100% of $100M.
Nor should they, because it's the investor who is contributing something new, not the employee. Employees should get re-upped when they are close to fully vested.
Why would it not be in everyone's best interests to have that conversation?