AngeBlog by Basil Peters

Director Equity Rate of Dilution

Its always easy to compare cash compensation from company to company because a dollar works pretty much the same way everywhere.

That's not the case with equity.

The biggest reason is that the number of shares outstanding from company to company can vary from thousands to hundreds of millions. That is why it makes more sense to talk about percentages than absolute numbers when discussing equity.

Its also challenging because the price per share can also very from pennies to dollars.

The rate of share value increase can also vary very dramatically. In the case of options, this can mean the value of sweat equity can easily end up being zero.

Another reason its difficult to compare equity compensations from company to company is the rate of dilution.

A high growth company with a roll up strategy could easily double its number of shares outstanding in a year. This means that a director who had a 0.5% option grant at the beginning of the year might only end up with options on 0.25% of the company by the end of the year.

A couple of examples of director equity compensations in different dilution environments are summarized here.

Nevertheless, to be fair, and be seen to be fair, it is necessary to take all of these factors into consideration when structuring the equity compensation components of total compensation packages.