Why Your "1% Ownership" Might Be Worth Nothing

Your offer letter says you own 1% of a company valued at $100M. Simple math says that is $1,000,000. But that simple math is wrong, and the difference can be devastating.

The headline number is not your number

When a company announces a $100M valuation, that number reflects the price paid by the latest investors for preferred stock — shares with special rights that your common stock does not have.

The most important of these rights is the liquidation preference.

How liquidation preferences work

A liquidation preference gives investors the right to get their money back before anyone else in an exit event (acquisition, wind-down, or IPO).

Here is a typical scenario:

This means in any exit, the first $100M goes to investors. Common stockholders (you) split whatever is left.

The waterfall at different exit prices

Notice: at a $100M exit (the "valuation" number!), you get nothing. The company has to sell for MORE than the total amount invested for common stockholders to receive a single dollar.

It gets worse with participating preferences

Some investors have participating preferred stock, which means they get their preference AND share in the remaining proceeds. In that case:

At a $200M exit with participating preferences: Investors take $100M preference + their share of the remaining $100M. If investors own 60% on a fully diluted basis, they take $100M + $60M = $160M. Common stockholders split $40M. Your 1% of common = $400K, not $2M.

What to ask before accepting an offer

The uncomfortable truth

Most startup acquisitions are for 1-3x the last round valuation. If a company raised $100M at a $400M valuation, a $500M acquisition sounds great — but after $100M in preferences, common stockholders split $400M. Your 1% is $4M, not the $5M you expected.

And if the company sells for $300M? Investors take $100M, common splits $200M. Your 1% is $2M — less than half of what the headline valuation implies.

The bottom line

Your equity is not `ownership% x valuation`. It is `ownership% x max(0, exit_price - liquidation_preferences)`, adjusted for participating preferences.

Always ask for the preference stack. It is the most important number that most startup employees never learn.