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I negotiated a deal with a startup when they wanted me to move overseas to work with them and I effectively received 2% ownership of the company plus a nice salary.

The company is getting ready to take the first round of investment and I'm a little confused by some of the verbage and guidance that the finance consultant is giving and was hoping that someone would clarify.

I dabble in day-trading so I'm a little familiar with stock which is basically what I have: 2% worth of stock in the company.

The consultant is suggesting that when the first round of investment takes place, everyone will give up part of their ownership in the company, but what we retain will just be worth more.

Is it accurate to say that I "have" to give up any of my stock for the company to take a round of investment?

I get that the stock is worth more, which is why I would prefer not to "sell" it.

What is traditional/typical in these situations?

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What you retain is only worth what you can sell it for. On paper that may be more after you get new investors - but it's still all just potential. –  Joe Strazzere Feb 13 at 19:03
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1 Answer 1

up vote 7 down vote accepted

Say the company has created 500 shares [or whatever number]. You have 10 shares [equivalent of 2%]. Now when new capital is needed, generally more shares are created. Say they create 100 more shares and sell it to venture capital to raise funds. After this happens;

Total Shares: 500+100 = 600
You own: 10 shares
Your Ownership % = 1.66% down from 2%
Like wise for other older shareholder.
The New Venture guy gets 16.66% of ownership.

More funds would mean more growth and overall the value of your 10 shares would be more depending on the valuation.

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