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March 20, 2007

Equity Math for Startups

by Dan

Paul Buchheit wrote a great article on how equity works in a startup:

The first thing to understand is that when shares are given to an employee or investor, they aren’t taken from someone else – they are newly created shares – the pie gets bigger. Of course, your slice of this newly enlarged pie is now a smaller percentage of the total. That’s dilution. A lot of people understand that. What they often don’t understand is deeper in the details.

He goes through several examples that made me even more suspicious of venture capital investment. A friend and I are starting a business together, so understanding how this works will (hopefully, assuming the business works out) be important.

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