Employee Equity: appreciation as Antidote to Dilution


Diagram of the typical financing cycle for a s...
Diagram of the typical financing cycle for a startup company. (Photo credit: Wikipedia)
Fred Wilson, in his excellent MBA Mondays, talked about Equity as a tool to attract, reward and retain top Executives, Advisers and key people in Start-up environment, and as a compensation of Sweat Equity. In the article “Employee Equity: Appreciation”, he describes Appreciation as an antidote to Dilution.
Talent for Equity™ considers this matter as essential and proposes you to share the content with you for explaining those concerns and enlarging points of view.
When an entrepreneur starts a company, in the vast majority of cases, the value of a start-up on day one is zero. One of the objectives is to steadily increase the Value of his business (the stock price).
When the Company generates revenues and earnings, the Company value can be valued using traditional valuation metrics, but early on in the life of a start-up, it is trickier to value the stock.
Through the VC business, each deal determines stock price through a process where investors are in competition and company and investors in negotiation. It is like a marketplace for start-up equity.
So between the formation time and the time of exit, there is a progression of price appreciation along the way marked by the progress of the business, financing events, revenues, and earnings.
It is appropriated for start-up entrepreneurs or employees with equity as part of compensation, to understand that the price doesn’t always rise. There can be setbacks in the business (leading to price declines) and on the capital markets (leading to less valuable)…
And if your Company fails, in that case, all of the employee equity will be worthless. But in the case of a start-up becomes a successful business, the price will appreciate over time. There can be price declines or long periods of price stagnation, but if you are patient and the business succeeds, the employee equity will appreciate over the long run.

– Talent for Equity™ team

For more details, see Fred Wilson’s blog 

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