Funding rounds and existing option grants
An employee holding options over a fixed number of shares is diluted the same way a founder is: their number of shares stays fixed while the total share count grows with each funding round or pool expansion. Unlike some investors, employees almost never have anti-dilution protection, so their percentage ownership simply falls with each round, following the same arithmetic set out under equity dilution.
For example, an employee granted options over 40,000 shares out of a 10,000,000 fully diluted total holds 0.4%. After a Series A round takes the fully diluted total to 13,000,000, the same 40,000 shares represent about 0.31%, purely from dilution, with no change to the number of stock options granted.
Valuation growth offsetting percentage reduction
If the funding round that caused the dilution also increased the company's valuation, the value of the employee's options can still rise even though their percentage fell. An option worth 0.4% of a 5,000,000 company is worth about 20,000; the same options at 0.31% of a 25,000,000 company after Series A are worth about 77,500, despite the lower percentage, a trade-off closely tied to how any concurrent pool dilution is structured.
Transparency regarding strike price and valuation
- The strike price of their options and how it compares to the current share value.
- Whether the company has raised funding since their grant and at what valuation.
- Whether a refresher grant is available to offset dilution over a long tenure.
- General information about total option pool size, though detailed cap table access is not always provided to employees.
Questions employees ask about their options
- Do employees usually get anti-dilution protection?
- No, this is uncommon for standard employee option grants; it is mainly a feature of preferred investor share classes.
- Can an employer offer refresher grants to offset dilution?
- Yes, and many companies do this periodically for employees with long tenures or strong performance, though it is discretionary, not automatic.
- Does dilution affect the strike price of existing options?
- No. The strike price set at grant does not change because of later dilution; only the percentage and, depending on valuation change, the potential value of the underlying shares changes.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.