If a startup can always issue new shares, what value is there to stocks/options?
The short answer, probably not much.  Unless you have a controlling interest in the company.  If at least 50%+1 of the shareholder votes are in favor of the dilution then it can be done.  There are some SEC rules that should protect against corporate looting and theft like what the Severin side is trying to make it appear as happened. However it would appear that Severin did something stupid.  He signed away all of his voting right to someone who would use them to make his rights basically worthless.  Had he kept his head in the game he could probably have saved himself.  But he didn't. If your average startup started issuing lots of stock and devaluing existing shares significantly then I would expect it would be harder to find investors willing to watch as their investment dwindled.  But if you are issuing a limited amount stock to get leverage to grow bigger then it is worth it.  In the .com bubble there were quite a few companies that just issued stock to buy other companies.  Eventually most of these companies got delisted because they diluted them selves to much when they were overvalued. Any company not just a startup can dilute its shares.  Many if not most major companies issue stock to raise capital.  This capital is then generally used to build the business further and increase the value of all shares.  Most of the time this dilution is very minor (<.1%) and has little if any impact on the stock.  There are rules that have to be followed as listed companies are regulated by the SEC.  There are less regulations with private corporations.  It looks like the dilution was combined with the buyout of the Florida company which probably contributed to the legality of the dilution.     With options they are generally issued at a set price.  This may be higher or lower than the reported sell price of the stock when the option is issued.  The idea is over time the stock will increase in value so that those people who hold on to their options can buy the stock for the price listed on the option.  I worked at an ISP start up in the 90's that made it pretty well.  I left before the options were issued but I had friends still there that were issued an option at $16 a share the value of the stock at the time of the issue of the option was about 12.  Well the company diluted the shares and used them to acquire more ISP's unfortunately this was about the time that DSL And cable internet took off so the dial up market tanked.  The value eventually fell to .10 they did a reverse split and when they did the called in all options.  The options did not have a positive cash value at any time.  Had RMI ever made it big then the options could have been worth millions.  There are some people from MS and Yahoo that were in early that made millions off of their options.  This became a popular way for startups to attract great talent paying peanuts.  They invested their time in the business hoping to strike gold.  A lot of IT people got burned so this is less popular among top talent as the primary compensation anymore. "Companies normally do not give you X% of shares, but in effect give you a fixed ""N"" number of shares. The ""N"" may translate initially to X%, but this can go down. If say we began with 100 shares, A holding 50 shares and B holding 50 shares. As the startup grows, there is need for more money. Create 50 more shares and sell it at an arranged price to investor C. Now the percentage of each investor is 33.33%. The money that comes in will go to the company and not to A & B.   From here on, A & C together can decide to slowly cut out B by, for example: After any of the above the % of shares held by B would definitely go down." "It's called ""dilution"". Usually it is done to attract more investors, and yes - the existing share holders will get diluted and their share of ownership shrinks. As a shareholder you can affect the board decisions (depends on your stake of ownership), but usually you'll want to attract more investors to keep the company running, so not much you can do to avoid it. The initial investors/employees in a startup company are almost always diluted out. Look at what happened to Steve Jobs at Apple, as an example."
"A company has 100,000 shares and 100,000 unexercised call options (company issued). Share price and strike price both at $1. What country is this related to?   I ask because, in the US, most people I know associate a ""call"" option with the instrument that is equivalent to 100 shares.   So 100,000 calls would be 10,000,000 shares, which exceeds the number of shares you're saying the company has.   I don't know if that means you pulled the numbers out of thin air, or whether it means you're thinking of a different type of option? Perhaps you meant incentive stock options meant to be given to employees?  Each one of those is equivalent to a single share.  They just aren't called ""call options"". In the rest of my answer, I'm going to assume you meant stock options. I assume the fact that these options exist will slow any price increases on the underlying shares due to potential dilution? I don't think the company can just create stock options without creating the underlying shares in the first place.  Said another way, a more likely scenario is that company creates 200,000 shares and agrees to float 50% of them while reserving the other 50% as the pool for incentive employee stock.  They then choose to give the employees options on the stock in the incentive pool, rather than outright grants of the stock, for various reasons.  (One of which is being nice to the employees in regards to taxes since there is no US tax due at grant time if the strike price is the current price of the underlying stock.) An alternative scenario when the company shares are liquidly traded is that the company simply plans to buy back shares from the market in order to give employees their shares when options are exercised.  In this case, the company needs the cash on hand, or cash flow to take money from, to buy those shares at current prices. Anyway, in either case, there is no dilution happening WHEN the options get exercised.  Any dilution happened before or at the time the options were created.   Meaning, the total number of shares in the company was already pre-set at an earlier time.  As a result, the fact that the options exist in themselves will not slow price changes on the stock. However, price changes will be impacted by the total float of shares in the company, or the impact to cash flow if the company has to buy shares to redeem its option commitments.   This is almost the same thing you're asking about, but it is technically different as to timing. If this is the case, can this be factored into any option pricing models like black-scholes? You're including the effect just by considering the total float of shares and net profits from cash flow when doing your modelling." As a start-up, the initial shares can be given at various price points. So essentially they can give someone a larger percentage based on the same amount earlier, and lesser percentage to someone else for the same amount. As its a start-up the valuations can be very tricy and what matters is that whether you believe the percentage you got for the amount is right or not.   It is very important to note that when you have been given an ownership in the company, how that is designated. Is it in absolute number of shares or is it in terms of percentage based on the existing shares. For example you maybe given 100 shares, without any qualification. Or you maybe given a 5% stake in the paid-up capital, that translates to 100 shares. It is always better to hold the shares in % of the total shares. Also read the contract, any dilution should require your approval. Normally start-ups once the valuation starts to go up, start creating more shares and sell these to private equity or create more shares and give it as a bonus to promoters. Hence in both cases your holding will keep getting diluted. There is a related quesiton If a startup can always issue new shares, what value is there to stocks/options? What you want is a cashless transaction. It's part of the normal process. My employer gives me 1000 options at $1, I never need to come up with the money, the shares are bought and sold in one set of transactions, and if the stock is worth $10, I see $9000 less tax withholding, hit the account. No need for me to come up with that $1000. If that company issues another 100 shares, shouldn't 10 of those new 100 shares be mine? Those 100 shares are an asset of the company, and you own 10% of them. When investors buy those new shares, you again own a share of the proceeds, just as you own a share of all the company's assets. A company only issues new share to raise money - it is a borrowing from investors, and in that way can be seen as an alternative to taking on loans. Both share issuing and a loan bring new capital and debt into a company. The difference is that shares don't need to be repaid. "Equity could mean stock options. If that's the case if the company makes it big, you'll have the option to buy stocks cheap (which can then be sold at a huge profit) How are you going to buy those without income?  5% equity is laughable. I'd be looking for 30-40% if not better without salary.  Or even better, a salary. To elaborate, 5% is fine, and even normal for an early employee taking a mild pay cut in exchange for a chance at return. That chance of any return on the equity is only about 1/20 (94% of startups fail) There is no reason for an employee to work for no pay. An argument could be made for a cofounder, with direct control and influence in the company to work for equity only, but it would be a /lot/ more (that 30-40%), or an advisory role (5% is reasonable)  I also just noticed you mentioned ""investing"" in the startup with cash. As an angel investor, I'd still expect far more than 5%, and preferred shares at that. More like 16-20%.  Read this for more info on how equity is usually split." Let's clarify some things. Companies allow for the public to purchase their shares through Initial Public Offering (IPO) (first-time) and Seasoned Public Offering (SPO) (all other times). They choose however many shares they want to issue depending on the amount of capital they want to raise. What this means is that the current owners give up some ownership % in exchange for cash (usually). In the course of IPOs and SPOs, it can happen that the public will not buy all shares if there is very little interest, but I would assume that the more probable scenario if very little interest is present is that the shares' value would take a big drop on their issuance date from the proposed IPO/SPO price. After those shares are bought by the public, they are traded on Exchanges which are a secondary and (mostly) do not affect the underlying company. The shares are exchanged from John Doe to Jane Doe as John Doe believes the market value for those shares will take a direction that Jane Doe believes in the opposite. Generally speaking, markets will find an equilibrium price where you can reasonably easily buy-sell securities as the price is not too far from what most participants in the market believe it should be. In cases where all participants agree on the direction (most often in case of a crash) it can be hard to find a party to make a trade with. Say a company just announced negative news with long-lasting effects on the business there will be a surge in sell orders with very few buyers. If you are willing to buy, you will likely very easily find a trading partner but if you are trying to sell instead then you will have to compete for the lowest price against all other sellers. All that to say that in such cases, while shares are technically sellable / purchasable, the end result can be that no shares are purchasable. "First, you mentioned your brother-in-law has ""$100,000 in stock options (fully vested)"". Do you mean his exercise cost would be $100,000, i.e. what he'd need to pay to buy the shares? If so, then what might be the estimated value of the shares acquired? Options having vested doesn't necessarily mean they possess value, merely that they may be exercised. Or did you mean the estimated intrinsic value of those options (estimated value less exercise cost) is $100,000? Speaking from my own experience, I'd like to address just the first part of your question: Have you treated this as you would a serious investment in any other company? That is, have you or your brother-in-law reviewed the company's financial statements for the last few years? Other than hearing from people with a vested interest (quite literally!) to pump up the stock with talk around the office, how do you know the company is: BTW, as an option holder only, your brother-in-law's rights to financial information may be limited. Will the company share these details anyway? Or, if he exercised at least one option to become a bona-fide shareholder, I believe he'd have rights to request the financial statements – but company bylaws vary, and different jurisdictions say different things about what can be restricted. Beyond the financial statements, here are some more things to consider: The worst-case risk you'd need to accept is zero liquidity and complete loss: If there's no eventual buy-out or IPO, the shares may (effectively) be worthless. Even if there is a private market, willing buyers may quickly dry up if company fortunes decline. Contrast this to public stock markets, where there's usually an opportunity to witness deterioration, exit at a loss, and preserve some capital. Of course, with great risk may come great reward. Do your own due diligence and convince yourself through a rigorous analysis — not hopes & dreams — that the investment might be worth the risk." "When you exercise your options, you come up with cash to buy the shares. This makes you an owner of the company for shares at the share price your options let you have. Ideally, your share price is at a significant discount to what the company is worth. Being a shareholder, you gain from any share price appreciation in a sale. The only thing the ""60-day window"" applies to is whether you come up with the cash to buy fast enough, or your shares get permanently deleted from the company finances, where everyone else potentially makes more, you make nothing. The sale of the company is based on whenever the sell finalizes, which is between your company and the acquiring company." It depends. If the investor bought newly-issued shares or treasury shares, the company gets the money. If the investor bought shares already held by the owner, the owner gets the money. A 100% owner can decide how to structure the sale. Yet, the investor may only be willing to buy shares if the funds increase the company's working capital. "Each company has X shares valued at $Y/share. When deals like ""Dragon's Den"" in Canada and Britain or ""Shark Tank"" in the US are done, this is where the company is issuing shares valued at $z total to the investor so that the company has the funds to do whatever it was that they came to the show to get funding to do, though some deals may be loans or royalties instead of equity in the company. The total value of the shares may include intangible assets of course but part of the point is that the company is doing an ""equity financing"" where the company continues to operate. The shareholders of the company have their stake which may be rewarded when the company is acquired or starts paying dividends but that is a call for the management of the company to make. While there is a cash infusion into the company, usually there is more being done as the Dragon or Shark can also bring contacts and expertise to the company to help it grow. If the investor provides the entrepreneur with introductions or offers suggestions on corporate strategy this is more than just buying shares in the company. If you look at the updates that exist on ""Dragon's Den"" or ""Shark Tank"" at least in North America I've seen, you will see how there are more than a few non-monetary contributions that the Dragon or Shark can provide." Selling stock means selling a portion of ownership in your company.  Any time you issue stock, you give up some control, unless you're issuing non-voting stock, and even non-voting stock owns a portion of the company. Thus, issuing (voting) shares means either the current shareholders reduce their proportion of owernship, or the company reissues stock it held back from a previous offering (in which case it no longer has that stock available to issue and thus has less ability to raise funds in the future).  From Investopedia, for exmaple: Secondary offerings in which new shares are underwritten and sold dilute the ownership position of stockholders who own shares that were issued in the IPO. Of course, sometimes a secondary offering is more akin to Mark Zuckerberg selling some shares of Facebook to allow him to diversify his holdings - the original owner(s) sell a portion of their holdings off.  That does not dilute the ownership stake of others, but does reduce their share of course. You also give up some rights to dividends etc., even if you issue non-voting stock; of course that is factored into the price presumably (either the actual dividend or the prospect of eventually getting a dividend).  And hopefully more growth leads to more dividends, though that's only true if the company can actually make good use of the incoming funds. That last part is somewhat important.  A company that has a good use for new funds should raise more funds, because it will turn those $100 to $150 or $200 for everyone, including the current owners.  But a company that doesn't have a particular use for more money would be wasting those funds, and probably not earning back that full value for everyone. The impact on stock price of course is also a major factor and not one to discount; even a company issuing non-voting stock has a fiduciary responsibility to act in the interest of those non-voting shareholders, and so should not excessively dilute their value. When a company IPOs the underwriters sell a given percentage on IPO day and shortly thereafter. Whatever is sold on IPO day trades freely.   Insiders, employees and investors who bought before the IPO only sell a percentage of their shares on IPO day. They all also agree to 'lock up' the remainder for a period of time, so that not everyone is rushing to the exits right away. Well, if you're an employee you don't per-se agree, it's just how your stock options are setup and you don't really have a say in the matter. No.  Mark-to-market valuation relies on using a competitive market of public traders to determine the share price --- from free-market trading among independent traders who are not also insiders.   Any professional valuation would see through the promotional nature of the share offer. It is pretty obvious that the purchaser of a share could not turn around and sell their share for $10, unless the 'free hosting' that is worth most of the $10 follows it... and that's more of hybrid of stock and bond than pure stock.  It is also pretty obvious that selling a few shares for $10 does not mean one could sell 10,000,000 shares for $10, because of the well known decreasing marginal value effect from economics. While this question seems hypothetical, as a practical matter offering to sell share of unregistered securities in a startup for $10 to the general public,  is likely to run afoul of state or federal securities laws -- irregardless of the honesty of the business or any included promotional offers.   See http://www.sec.gov/info/smallbus/qasbsec.htm for more information about the SEC regulations for raising capital for small businesses. My understanding is you can create a company 0 value. Then you need to either loan the company the money to buy the building (it will still have 0 value as it will have a debt equal to it's assets) or sell share to investors at any price you like to raise the money to buy the building.  Once shares have value (as valued by a chartered accountant - not anyone can do this) then anyone recieving shares will have to pay income tax. This is why keeping the shares as no value for as long as possible can be preferable. Also a benefit of using share options. talk to your investors, see what they require. The buyer can get another cosigner or you can sell the car to pay off the loan. These are your only options if financing cannot be obtained independently.