Beginning It was the year 2013, I was working as a part-time CTO in several software startups in a startup incubator. On one of the “Friday beer” evenings I was approached by a huge old man, in just a few seconds he broke the ice, touched my shoulder, and behaved like we were old friends. It turned out he knew who I was. It all looked random to me, but it wasn’t. Years later he revealed: “I moved into this incubator because I wanted to hire you.”

CoFounder He was about to start a hardware startup that wanted to build a vending machine that looked like it was made by Apple. Until this day, I’ve spent years building software, and his idea around hardware felt so compelling, that I had no doubt and joined him as a CTO and CoFounder. I got 15% of the company.

Rich Man He was a rich man, with a huge house in the best luxury area of the city, with a big exit in the past. He kept saying: “I can’t do this without you..”. Which was very inspiring, and I probably did my best job ever over the the few years. I worked days and nights, my girlfriends left me because we didn’t see each other at all.

Living A Dream Things were going really well, We met Jack Dorsey in SF and presented our machine, partnered up with his company that was doing the payment stands. Lots of the doors were open, We raised money from investors and got into the best b2b accelerator in the world.

Departure While things were going really well, I realized that I could not work here, mainly because I realized I had no passion for hardware and I wanted to be my own boss, while being CTO meant that my boss was the CEO. I spent a year on hiring more people and finding a new guy to replace me as CTO. The replacement went very well, so eventually I left.

I Lost It I moved on with my new startup but a few months later I got an email from the board. They were planning a new funding round as it looked like to me. So first I was happy about that, it meant my shares would be worth more. But it turned out they were planning an internal round, where all investors had to put money in. For all the investors it was relatively little money, but for me, it was more than I could afford. Since I owned 15% and couldn’t participate in the round, my 15% was diluted to 0.15%.

Why? It turns out that in a VC-funded startup, it’s very easy to lose all almost your equity if the startup decides to have an internal round and issue new shares. It may have 100 shares, I own 15 and others own 85. Then it may issue 1000 shares, where each costs 10k. So I’d have to put 150k to stay with my 15%. (the numbers aren’t real, just for an example). So this was the end of the story for me.

The moral: owning Equity in a startup doesn’t protect you at all unless you’re rich.

[An Update/Clarification]

Comment from a Reddit user:

The trick was the pre-money valuation was decided by the “internal round” participants. They basically decided the company was near worthless valuation pre-money. This then meant you owned 15% of nearly nothing.

Reply from me:

YES! This is the only reply that's correct under this thread. This is exactly what happened under the hood. Very few founders know this may happen, and most think their equity is safe, just like I thought. But in this case, both the founders and early investors lost nearly all their shares. (99% of it). Someone might ask: how can they reduce the valuation to such a low number? well, in startups, the board is usually small, just CEO+Chairman, and they can vote for anything they want and it's easy to justify stuff. because they control the story

user:	pjdemers
created:	December 21, 2015
karma:	689