Press Room

August 06, 2012

One Man’s Take on Solutions to Dilution

Recently I was talking with two young founders of a tech company. They started the enterprise 10 years ago and are now in the midst of an impending sale of the company. They were expecting to get about $20 million of cash proceeds so we started to discuss planning for their tax bills.

“Yeah,” the CEO explained ruefully, “we had to raise so much money that our founders’ shares represent less than 1 percent of our final take. But the investors were smart—they knew they needed us to stay motivated—so most of our equity is nonqualified stock options.” 

I was astounded. Heavy dilution often happens, and sometimes you need to do that to make the dream come true, but stock options as the solution was a real shame. The income tax bite will cut their net cash nearly in half!

“Well,” the CEO continued, “we looked at other options like stock grants or loans but were advised they wouldn’t work because our valuation kept increasing. So we were stuck with options.”

That advice cost these founders millions of dollars. There are better solutions...

Mass High Tech Business News
Monday, August 6, 2012
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