Last version published: 16/03/2018 09:20
Publication number: ELQ-55053-2
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The ESOP (Employee Share Ownership Plan) dilution Excel model
How startup dilution works for founders with ESOPs and investment.
In the startup world, we all need to learn at some stage how to make money. It's not as simple as creating a business, make some money, sell it on and start your life as a millionaire.
Many begin by owning the entire company, and if you don't give shares to your employees you'll always own the entire business. This is quite common for modern tech startups because as you go along and grow, others get a share of your company. Other people receiving a cut is known as dilution. I'm going to talk here about the effect of ESOPs, so you'll learn how your employees can make money as well.
Dilution is when the ownership stake in your company that belongs to you is less than before because you have shared ownership with another person. When other people are owners of a share, they get a cut of the money if the company is sold. Each time there is a dilutive event, the people who were on the cap table previously will be diluted equally except if they have some sort of exclusionary rights.
The sooner a person becomes part of or invests in the business, the more they will be diluted because they'll go through dilution at each event. This signifies that as the owner, you along with the other primary owners, are going to suffer the most dilution.
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