I got diluted, and all I want is to be made whole. Why is that such a big deal?

Dear Heidi,

I’m feeling really deflated and devalued right now. I know I should be happy for my company, but I didn’t realize the toll it would take on me. Here’s the sitch: I joined a tiny company two years ago as VP of marketing right after they raised their $2 million seed round, and they gave me 1% of the company. They just raised their Series A, $25 million — which is awesome! However, in order to do so, they sold 25% of the company. So now I only have .75%. Recruiters have told me the going rate for marketing VPs is around 1%, so I’m now really being undervalued. I love working here, so I went to the CEO today and asked that I simply be made whole — i.e., just grant me more shares to get back to my 1%. That seems totally fair to me, but she said she couldn’t do that. What do you think I should do? Help me, Heidi!

- Diluted, Deflated, and Devalued, Mountain View, CA

Dear Diluted,

I get it. You were told the going rate is 1%; you had 1%, you’ve worked for two years, now you have less. That doesn’t feel fair at all! But here’s the problem. No matter what a company does, you cannot change the immutable math that there will only, ever, be 100% of the company.

You can issue more shares, you can make the company more valuable and therefore make the shares worth more, but you can’t make more than 100%. And therein lies the problem of pegging compensation to a percent of the company.

Inherently, successful companies, as they grow, also need more people. In fact, they likely need more people who are even more experienced, and therefore, even more expensive. But if everyone wants to be paid a specific percentage, and if everyone wants to be made whole every time a dilutive event such as a fund raise happens, well, you do the math.

Actually, you can’t do the math, because this math is impossible.

That does not mean you’ll never get more shares. Many companies include some form of evergreening that will give existing employees new shares once their current options are, say 60% vested. And of course, new employees need grants too. It is not uncommon for Silicon Valley companies to issue 3–6% of their equity out to employees each year to fill these needs. But that stock has to come from somewhere.

Where do these additional shares come from? Usually, there is some amount, say 15–20–30%, which is set aside in an employee option pool when the first financing is consummated. When the company runs out, the board can authorize more shares, but since it can’t make more than 100%, those newly authorized shares dilute all current shareholders — the investors, the founders, the employees. The more successful the company gets, in fact, the more dilution you are going to have!

The key is to focus on what you can do to help make those shares grow to be worth more.

Let me try to paint the picture with an example:

Say your company has a million shares authorized and $2 million in venture capital when you join. They give you an option for 100,000 shares or 1%. The company never raises more money, you stay there for four years, and then it is sold for $25 million. In this case, you would walk away with roughly $230k ($25 million minus $2 million preferences, so $23 million, of which you’d get 1%.)* You would also have to deduct whatever the strike price was (that is, what you had to pay for your options), but I am presuming the number is tiny because the company was not worth much when you joined.

But now let’s say instead, the company you join really takes off, but it needs more capital to fuel its growth. After two years of work on the product, and some early customer wins, the company goes out to raise $25 million more, and gets competing term sheets. They choose one that values the company at $75 million. They authorize 25% more shares to sell to these new investors because $25 million out of a total company value of $100 million (the ‘pre-money valuation plus the $25 million that goes in the bank) is 25%. Your 1% is diluted down to .75%. Then the company uses that $25 million to grow the company for the next two years, and then, bingo, Salesforce comes in and buys it for $250 million. Now those same shares would be worth $1,672,500 ($250 million minus the $27 million of capital that went in, or $223 million, of which you’d get .75%, or $1,672,500.)* Much better!

As I tell my students, you can never make more than 100%. But you can make that 100% more and more valuable. Good luck growing that value!

- Heidi

• both these calculations assume participating preferred, but most preferred nowadays is non-participating, so you’d actually be a little better off in each scenario — but the math is more complicated and the delta is minor so I stuck to this to prove my point. If you want to geek out more on the difference between participating and non-participating you can go .

Send me questions at HelpmeHeidi@threshold.vc