The Option Pool Shuffle

venturehacks.com

SUPPORTED BY Products Archives @venturehacks Books AngelList About RSS The Option Pool Shuffle by Nivi on April 10th, 2007 “Follow the money card!&# – The Inside Man, Three-Card Shuffle Summary: Don’t let your investors determine the size of the option pool for you.

Sizing Option Pools In Connection With Financings

A VC : Venture Capital and Technology

Investors like to require that an unissued option pool is in the pre-money valuation calculation when they put money into early stage companies. This post is about how to size the option pool. What I like to do, as I mentioned in the post I linked to, is agree with the entrepreneur that the option pool will have enough unissued options to fund all the hiring and retention grants that need to happen between the current financing and the next one.

Option Pools and VC Negotiations

Rob Go

In my last post about raising seed vs. jumping straight to A, I received a good comment from Chris Woods that my analysis neglected to include the impact of option pools that are created at each financing round. In almost every financing round, there is an important stipulation in the term sheet that talks about the employee option pool that will be created in tandem with the financing. Add it up, and ask the VC why that level of options is not sufficient.

Introducing the Cap Table and Hiring the CTO

Feld Thoughts

As first time entrepreneurs they did not create an employee options pool; we’ll fix that in a little while. They come up with two options: Hire Praveena as an employee and offer her stock options. Now there are two events: the initial issuance of founders common shares, and then issuing new founders common shares along with creating an options pool. If the full pool were to be given out, the dilution is fairly significant to the founders.

Doing Deals – 3 Tips for Entrepreneurs (Part 2)

Scott Edward Walker

Indeed, there comes a point in time in just about every deal where both sides have dug into certain positions and the question becomes which side will blink first; for example, in a venture capital financing, perhaps the issue is the liquidation preference or the size of the option pool ; or, in an acquisition, perhaps the issue is the cap on seller’s liability or the amount of the escrow.

How to Raise Investor Funding for Your Startup

Early Growth Financial Services

Valuation — Know what these terms mean: Fully-diluted — This includes all issued stock and anything that could be converted into common stock (typically after an acquisition or IPO), such as your stock option pool.

What do investors consider the most important aspect of a potential deal?

Gust

Valuation, Size of Raise, Amount of Investment, Form of Investment, Liquidation Waterfall, Option Pool, Board Composition, Anti-Dilution Rights, Protective Provisions, Founder Vesting, *original post can be found on Quora @ : [link] *. Characteristics of the Entrepreneur. Integrity, Passion, Startup Experience, Domain Expertise, Functional Skills, Leadership, Commitment, Vision, Pragmatism, Flexibility, Personality. Characteristics of the Venture.

Why offering employee equity is crucial for your startup

The Next Web

In one instance, I told a CEO that we typically recommend a 15 percent stock options pool at seed/Series A stage. Andrej Kiska is an associate at Credo Ventures.

Venture Deals 3.0

A VC : Venture Capital and Technology

One of those three partners, Bliss McCrum, peeked his head into my office (I had an office in Rockefeller Center at age 25) and said to me, “Can you model out a financing for XYZ Company at a $9 million pre-money, raising $3 million, with an unissued option pool of 10%?” I thought I could figure out the “unissued option pool of 10%” bit. This was almost a decade before Netscape and Internet search so searching online for it wasn’t an option.

What is the “maximum” amount (%) of a startup an investor should have?

Gust

So, for example, taking a not-uncommon streamlined case of a company that had a seed round, a Series A and a Series B before being acquired (and for the purposes of this exercise disregarding any option pool), the math for a single-founder’s ownership of a startup would work like this based on giving up 20% each round: After Founding: 100%.

What’s In A Term Sheet?

Early Growth Financial Services

It could be the size of the option pool, or maybe the provisions around reverse vesting. You came, you pitched, you conquered. Congratulations! But do you know what to do once you’re asked to sign a term sheet? Let me say that first, you should have already retained a good startup lawyer. Most investors will expect this.

Model Cap Tables With VCHub

Ask The VC

The LearnVC site has a bunch of other interactive examples for some of the basics of venture financing including: Option Pool Creation. A few days ago I answered a question on AsktheVC about modeling cap tables. After a quick email conversation with Jeff Boardman (founder of LearnVC ), I realize I had left his product off the list.

Remind Me Why I Love You? (Why “In Person” is Everything)

Both Sides of the Table

I also had to negotiate a follow-on round at a portfolio company because new investors were trying to force a bit option-pool top-up that would dilute the founders and existing shareholders and existing investors were fighting over prorata rights.

Wenger: Presenting Option Grants to Boards

Ask The VC

Today’s VC post of the day is from Albert Wenger (USV) and titled Presenting Option Grants to Boards. While there is no standard for how to present option grants, Albert lays out a very clear set of eight pieces of data he likes to see. The first four are the the columns in the spreadsheet and each employee / option grant are the rows. The next two are footnotes for options grants that aren’t standard. Equity board of directors equity options wenger

Venture Deals: Chapter 7: The Capitalization Table

Ask The VC

If you get confused about how much you might own after the pre-money, post-money math and option pool (issued and unissued) calculation runs through the cap table, along with being perplexed on how to actually calculate price per share in a complicated financing, this is the chapter for you. Now is your chance to show off their proficiency with a spreadsheet.

What is it Like to Negotiate a VC Round?

Both Sides of the Table

How much is in the option pool? Well, if you have an option pool of only 6% and have many more execs to hire to build out your team you’re going to ask for more options to be created in the future. When you do, my 20% becomes 15% and thus my true price for your round is actually higher than it appears when I invested because I already know I’m going to face more dilution for options.

What is an effective “pre-incorporation-agreement” between possible founders of a startup?

Gust

Then sit down with your co-founders and divvy up the equity based on the contributions you all believe each of you will make…providing for reverse vesting, a large option pool, and a clear decision-making structure. The bottom line is that the very question you are asking is one of the trickiest things of all when it comes to startup founding.

Want to Know How VC’s Calculate Valuation Differently from Founders?

Both Sides of the Table

I’m not sure I really even need to write this at length because Nivi absolutely nailed the topic in his article “ The Option Pool Shuffle.&#. I had several term sheets and one of the leading term sheets had an option pool of 40% in it.

Anatomy of a Term Sheet: Nature of a Term Sheet and Summary of Offering Terms

VC Ready Blog

Second, the employee option pool is typically set at 15-20% of a company’s fully-diluted post-money capitalization at the time of a Series A financing, though it is sometimes set as low as 10% or as high as 25%. The principal factor in determining the size of the pool should be the need to incentivize current and future employees, so a company with a strong core team already in place should not need as large a pool as a company that expects to hire a new CEO in the near future.

Anatomy of a Term Sheet: Nature of a Term Sheet and Summary of Offering Terms

VC Ready Blog

Second, the employee option pool is typically set at 15-20% of a company’s fully-diluted post-money capitalization at the time of a Series A financing, though it is sometimes set as low as 10% or as high as 25%. The principal factor in determining the size of the pool should be the need to incentivize current and future employees, so a company with a strong core team already in place should not need as large a pool as a company that expects to hire a new CEO in the near future.

In VC deals, Price Doesn't Matter - But The "Promote" Does

Seeing Both Sides

Another term that impacts the price is the size of the option pool. These new hires typically receive stock options, and the issuance of those stock options dilute the other investors. In anticipation of those hiring needs, many VCs will require that an option pool with unallocated stock options be created prior to the money coming in, thereby forming a stock option budget for new hires that will not require further dilution after the investment.

Y Combinator's Sam Altman to Founders: You Get Too Much Equity

Inc Startups

Altman also argues that employees should get more equity, that they need to be better educated about stock and option grants, and that the tax treatment for options is often unfair. This is silliness, he says, because boards can increase option pools whenever they want.

Raising Capital: 4 Things You Must Do

Inc Startups

Don''t spend all of your energy negotiating valuation when you could be talking about the options pool. VCs may force you to create an options pool to reward future hires with equity. But VCs expect the options pool to come out of your pocket.

Comparing valuations between rounds

The Equity Kicker

Note: if the option pool has been increased between rounds this will have the effect of reducing the increase in share price and should be factored into the analysis. We’ve just been writing an update for investors about the progress our partner companies have been making.

Raising Funding From Family and Friends: Division of Equity

Business Plan Blog

You have looked at the advantages and disadvantages, and have decided it is the best option for your startup. You also need to think about how much equity you want to have set aside and available for your future employees in your option pool.

Entrepreneurs: Your instincts are always better than bad advice

The Next Web

More often than not, these companies have no formal option pool, although many have either formal or informal promises to grant options to key employees. Neil Rimer is a Partner and co-founder of Index Ventures.

Curated Blog Links: Week of May 20

Leveraging Ideas

Sizing Option Pools In Connection With Financings. Infographic: A Look At The Size And Shape Of The Geosocial Universe In 2011. May 20, 2011. Founder Stories) Hashable’s Yavonditte: Being Lean Does Not Mean Staying Small. May 19, 2011. Simplee Makes Your Medical Bills Understandable.

Stock Option Plan Rule of Thumb No. 1

Business Plan Blog

Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan. It is critical for a start-up to consider this reality and reserve 10-20% of its outstanding equity for a stock option plan. Most sophisticated investors will require a stock option pool upon investment, and a company that fails to reserve a sufficient amount of equity up-front runs the risk of being forced to establish a pool at a later date that may dilute the founders’ ownership.

Equity for Early Employees in Early Stage Startups

SoCal CTO

Wilson Sonsini and DFJ Gotham Ventures : The Option Pool Shuffle : Title Range (%) CEO 5 – 10 COO 2 – 5 VP 1 – 2 Independent Board Member 1 Director 0.4 – 1.25

Standart termsheets

The Equity Kicker

We have taken their feedback and tweaked the termsheet as appropriate with the result that on all terms bar valuation, option pool and details of founder vesting our termsheet is now, in effect, very close to fully negotiated before we send it to companies.

How to Raise a Seed Round: Three Basic Tips for Founders

Scott Edward Walker

Despite all the hype in the press (including with respect to the latest ICO craze), raising funds for your startup is still tough – particularly if you’re not located in San Francisco or Silicon Valley.

Punch & Pie: How Should Co-Founders Divide Equity?

Agile VC

You don’t really need to worry about how much common stock will be set aside for an employee option pool or how much preferred stock might be issued from raising future VC rounds in order to determine an equitable founder stock division.

Equity 193

Punch & Pie: How Should Co-Founders Divide Equity?

Agile VC

You don’t really need to worry about how much common stock will be set aside for an employee option pool or how much preferred stock might be issued from raising future VC rounds in order to determine an equitable founder stock division.

Equity 193

Best Practices Series Wrap-Up: All About Term Sheets

UC Berkeley

Although the standard option pool (to incent key hired) is typically 20%, this is one of a few areas where there is wiggle room for negotiating with the VCs. “Never ask for a VC meeting on Monday…total rookie mistake,” said Mintz Levin’s Brady Berg and VantagePoint Capital Partners’ Neil Wolff. Because that’s the day partners’ meetings are scheduled. Here are five other notable quotes and practical tips from their hands-on BPS earlier this month.

How to Divide Founder Equity: 4 Criteria to Discuss

View from Seed

You don’t really need to worry about how much common stock will be set aside for an employee option pool or how much preferred stock might be issued from raising future VC rounds in order to determine an equitable founder stock division.

Equity 194

Reblog – Finance Fridays (Introducing the Cap Table and CTO)

ithacaVC

Note how the new CTO Praveena implicitly negotiated to get her 15% founders shares after creation of the stock option pool. This is significant because Jane and Dick took all the dilution from the option pool creation. Options and warrants also each need a separate tab and they are each also reflected on the combined tab. It is all about detail and reflecting changes (like additional option grants) on a timely basis.

Standard termsheets

The Equity Kicker

We have taken their feedback and tweaked the termsheet as appropriate with the result that on all terms bar valuation, option pool and details of founder vesting our termsheet is now, in effect, very close to fully negotiated before we send it to companies.

some thoughts on term sheets

Seed Stage Capital

2: The option pool. option pool is not going to be enough to "pay" these people what they want.

Term Sheet Purgatory

The Startup Lawyer

Terms like the option pool , liquidation preference , and board composition are just a few other investment terms that have a meaningful impact on your startup. You’ll feel real solid about that $6,000,000 pre-money until you receive the term sheet and it specifies a 25% option pool, 1X participating liquidation preference, and an investor-favorable board.

Cap Table Clean Up

ithacaVC

They are typically pretty simple: (i) shares owned by founders and (ii) shares authorized for issuance in a stock option pool, some of which may be issued to employees already and some of which will be available for future issuance. VCs in particular typically insist on a slug of available options counting in the pre-money share total as they do not want to be diluted later by the issuance of those options.