Corporate & Securities Law

Non-Dilution Rights are Wrong

By Ryan Roberts

I hate non-dilution rights and if you are an entrepreneur you should, too.

I’m not talking about price-based anti-dilution protection that is typical in an angel or VC round. What I’m referring to is a right given to a particular stockholder so that such stockholder’s equity in the company is not diluted by any future issuance of stock — regardless of the price.

Investors will say this “protects” their investment from issuances of equity that do not benefit the startup. But the fact that the startup’s founders are being diluted by such an issuance should provide enough protection.

Unfortunately, for some investors having the founding team sit “side by side” with them is not enough protection. My advice to those investors requesting non-dilution is: if you don’t trust the founding team from issuing stock in the hopes of increasing the startup’s value — don’t invest in the startup.

My advice to entrepreneurs is, if you have an investor asking for non-dilution, it likely means that the investor doesn’t think you’re good enough to run the company. The investor is likely in love with your startup’s idea, but not in love with you.

Full post as published by The Startup Lawyer on March 01, 2011 (boomark / email).