tech-company, equity, investmentA,B and C started a software company investing equal amount of investment. So they each have 33% of shares of the company. As none of them have sufficient skill to develop their first product they are planning to onboard another person(D) who have sufficient skill to develop it. D is given the responsibility to build and manage the developer team, taking care of the development of the product in a word.
Since D is working under less salary than the market standard and also giving more effort to the company than others, he is offered company equity by A, B and C.
D’s equity is totally sweat equity, so he is concerned about the dilution of his shares when more investment comes to the company. Can he claims immutability of his equity? I mean, can he claim that some portion of his share will not be diluted at equal proportion to the other shareholders?
D can’t really “claim” anything. It’s entirely up to the other equity partners to decide how (and whose) shares are diluted when new investment comes in, and they can negotiate something with him, but if you’re asking if there’s some kind of rule or law on the issue, then the answer is no.
It is not uncommon for early participants (whether founders, critical hires, or investors) to have their equity diluted, and the method by which this happens is as individual as the companies themselves. This is where it’s important to have a very clear understanding up front about how that will work for each person in the company, so that there are no surprises. If you ever watched the movie “The Social Network”, you see where one of the original partners had his shares diluted down to almost zero as new investors were brought in.
Does anyone have a specific right to demand non-dilution? Not really, although the people who have contributed the most and play the most crucial roles would certainly have a good argument for why their shares should be diluted least or not at all. Whether this is acceptable to everyone else in the company is a matter of policy, not law.
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