Normal vs. dilutive distributions

Traditionally, dividends are paid at management's discretion. Under FairSetup a distribution is mandatory: revenue is offered to all partners, which protects them from never seeing a financial benefit if management never pays a dividend or exits the venture.

The example below is used for both types so you can compare them. You own 10.00% of a company valued at $1,000,000. The company distributes $50,000, so your share is $5,000. Unless noted, the other partners reinvest their shares in full.

The valuation is not changed. Taking your share in cash leaves the value of your position untouched, and whatever you reinvest is added to your position at the current valuation. Your ownership percentage moves only by the normal, minimal amount that comes from other partners adding capital.

A reinvested share stays tied to the equity that earned it. If a long-cycle multiplier later settles the labor behind your position, the shares that position produced are settled in the same proportion.

Taking your whole $5,000 in cash while everyone else reinvests moves you from 10.00% to 9.57% — a small shift, the same one any new investment into the company would cause.

The distribution is priced at a reduced valuation — here $500,000 instead of $1,000,000. At the lower price every reinvested dollar buys more ownership, so every dollar taken in cash gives up more. The redistribution is zero-sum: what cash-takers lose, reinvestors gain.

• Reinvest your full share and your ownership holds or grows — it grows whenever anyone else takes cash.
• Take cash while others reinvest and your ownership goes down: taking the whole $5,000 costs about twice the ownership it would in a normal distribution (9.17% vs. 9.57%), because the valuation was cut in half.
• If everyone takes their full share in cash, nobody's ownership changes.

An extreme case: you own 1%, and $100 is distributed at a reduced valuation of $100. You hold $1 of equity plus $1 of distribution. If everyone reinvests, you own $2 of $200 — still 1%. If you take your $1 in cash and everyone else reinvests, you own $1 of $199 — about 0.5%.

A growing venture has to balance two things: being fair to partners, who should be able to decide whether to reinvest or take their portion of revenue, and keeping the venture going, which takes working capital that comes from reinvested revenue. Dilutive distributions steer how much capital partners leave in versus take out.

Preventing abuse: so management can't run only dilutive distributions while paying itself a high salary, the CEO is compensated only through distributions. If there are no normal distributions, the CEO cannot receive any benefit without being diluted too.