How to properly get diluted.

August 14, 2023

by a searcher in Delaware, EE. UU.

Hello people,

A very high profile retired CEO is joining my holding company as an investor and also as advisor.

Till today, i have in my shareholder agreement that i own 51% of the holding and that my shares are non-dilutive shares.

He wants that my 51% starts getting diluted now so he can brings capital from funds in the future (since he thinks that none big fund will accept that terms).

How you guys are protecting yourself from getting diluted in potencial furters capital ampliations to make more acquisitions? (when the LBO is not possible).

Ps.- i am not close to not get diluted but i want to learn how other searchers are structuting their funds.

Thanks

Reply by a professional
from Dartmouth College in Los Angeles, CA, USA

He's actually right. No sophisticated investor would invest into a company where only they and other minority shareholders are diluted when additional shares are issued but the majority shareholder is not diluted alongside them. You would have the right to maintain your share by co-investing or by earning additional sweat equity for services, but a permanent non-dilution right would kill most, if not all, deals with professional investors.

Reply by an intermediary
in Boston, MA, USA

Assuming you are planning to sell the operating asset at some point in the future, then what you really care about is how the proceeds are distributed. Similar to other comments already made, you can set up your operating agreement to distribute proceeds depending on the type of stock owned. E.g., "Preferred' investors may receive all proceeds up to a certain amount (or MOIC, IRR, etc.) followed by 'Common' equity and so on.

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