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.

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.

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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.

Should I Use My Investor’s Lawyer?

Scott Edward Walker

For example, he will explain to you how the liquidation preference works and run spreadsheets, if necessary, to show you how much money you will receive based on different sale scenarios; he will explain to you how the option pool works, including the founders’ significant dilution; and he will discuss what protective provisions are and other tricky legal terms, such as drag-along rights and anti-dilution provisions.

CMO CTO COO Equity and Compensation

SoCal CTO

To find the equity numbers that were relevant for the particular person here, I went back through my prior post and looked at Wilson Sonsini and DFJ Gotham Ventures The Option Pool Shuffle Employee Equity How Much How much equity for investors and employees? Quick & Dirty How-To: Employee Stock Option AllocationsI was just asked about a particular startup situation (seed stage, CMO hire, non-founder) and particularly what compensation and equity is appropriate.

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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 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.

Founders Should Set Aside More Equity for Their Team & “Split the Pain” With Investors

Hunter Walker

But employee option pool is important enough that I wanted to briefly expand upon my comment above. Employee options pools, typically created at the point of financings, shouldn’t be treated as haggling over dilution, but rather a strategic resource that will help founders build the best team and, by extension, a more valuable company. As you can see, Weekend VC Twitter gets pretty wild and crazy!!!!

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.

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. Option Pool — An important piece of your hiring and compensation … Continue reading → Videos We recently participated in a panel discussion and workshop at Ubifrance. Nicolas L.

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. Editor’s note: Understanding how to divide founder equity at a startup can be tricky, even to the point of reaching emotional riffs between founders.

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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. You had an amazing meeting with an investor. Your product demo crushed. The dialog was great. They told you how much they loved your space. The meeting was only supposed to last 45 minutes but you ran 90.

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. It is not uncommon for us to come across a one-year old startup that has yet to release its product, in which the angel investors already own 60% of the company, three founders (together) own 40% and there is no option pool. Neil Rimer is a Partner and co-founder of Index Ventures.

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%.

Designing the Ideal Board Meeting – The Board Meeting

VC Adventure

The former is nice because you won’t be rushing to approve minutes, option grants, lease approvals or whatever else it is that you need done as “official business.” There are, of course, some items that the board has specific decision making authority over (buying another company, increasing the option pool, signing leases of a certain size, etc.). This is the 4th post in my Designing the Ideal Board Meetin g series.

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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. A few of them have done good up rounds and the easiest way to describe the magnitude is to talk about the valuation multiple.

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.

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.

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.

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.

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.

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. Future investors will want and option pool, and more importantly it is ways of attracting talented employees to your startup. Raising Funding From Family and Friends: Division of Equity.

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. I like to say that “there are only co-founders” — it’s extraordinarily rare for a successful business to have just a sole founder. But not all co-founders are equal in terms of title, ownership, responsibilities, and so forth.

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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.

What to expect before accepting the offer to become Engineer #1 at a startup

The Next Web

In exchange, the engineer is likely offered the promise that his or her option shares will one day turn into big money. Startup employees are granted common shares out of something called an option pool. It is typical for employees to vest their options over four years with a one year cliff, which means a new hire must stay on the company for at least one year to see any shares. “It kinda sucks to be engineer #1.”.

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.

Building Convertible Debt into the Premoney Valuation

ithacaVC

Option pool: 500,000 shares (some issued, some reserved, but that is typically irrelevant as the whole pool is normally factored into the premoney share price calculation). So, to calculate the Series A share price, you take the premoney valuation of $3mm and divide it by the number of premoney shares, which again will typically include the whole option pool.

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. We have a standard termsheet that we’ve used on our last few deals and plan to publish in the near future once we’ve ironed out some final wrinkles.

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 I was asked by a reader how much equity he should give out to early employees and to service providers in a very early stage startup. I'll get to service providers in a later post. Founders vs. Early Employees To help with this discussion, let me start with a definition of "early employee."

Dear elizy: How should I split equity with my co-founders?  And how will that affect raising a seed round?

Hippoland

But, Ada wants to split the equity 50% her, 20% Bob and 20% me with a 10% option pool. Dear elizy : I started a company in school with two co-founders. Let’s call them Ada and Bob. Ada is my professor, and we are using her lab, and the company is based on her research, though the IP is assigned to the company. Bob and I were her students and will be graduating this year.

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. I like to say that “there are only co-founders” — it’s extraordinarily rare for a successful business to have just a sole founder. But not all co-founders are equal in terms of title, ownership, responsibilities, and so forth.

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Startups: Cut the Wheat from the Chaff on Quora

VC Cafe

Instead of a 20% option pool, we created a 40% option pool, and gave out half of it to the first half-dozen hires who came on and were willing to work without salary for a period of time, forming the core team.

Careful about equity and options in early stage businesses

Berkonomics

And then there are options: [Email readers, continue here…] Stock options or phantom stock are the tools of early stage businesses used to attract great talent when there is not enough cash to pay market rates. First you must create a stock option plan using your attorney, which must be registered in many states as a security offering. Options are usually best with “C” corporations, but granting options for either LLC’s or “S” corporations are not a real problem.

Is it Time for You to Earn or to Learn?

Both Sides of the Table

Now … these are stock options and not restricted stock so you’ll likely be taxed at a long-term capital gains rate. Stock options are the icing on the cake. Don’t join for the options.&#. This is part of my Startup Advice series.

How to Evaluate an Offer from a Startup Incubator

The Startup Lawyer

Other incubators may want to set up an option pool. If so, the startup’s founders need to know this option pool lowers your pre-money valuation. Using the previous example, if an incubator wants your startup to set up a 15% option pool as part of the $25,000 for 6% of the company, the pre-money valuation gets effectively reduced to $329,167. Great news — your startup just got accepted to an incubator!

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. We have a standard termsheet that we’ve used on our last few deals and plan to publish in the near future once we’ve ironed out some final wrinkles.

Memo to CEOs & Founders: Stop Being Such Cheap Bastards

techcrunch.com

You could make the same argument about acquisitions and option pools. Now consider what would happen if the same company raises another $10 million, expands the employee option pool to hire more executives and to support 300 people. This is an anonymous guest post from a well known startup executive: When we split the atom, Einstein remarked that everything changed but our way of thinking.

5 Tips for Raising a Venture Round

ReadWriteStart

Including things like liquidation preferences impact both future rounds and ultimate liquidity to why VCs ask to expand an option pool before investing as part of their term sheet. While certainly not every business needs to raise venture financing, it is the path for many high-growth technology startups. Therefore, going down the fundraising path is something many technology entrepreneurs will need to do and a critical step in the development of their business.

Beware of Premature Merge Elation

Both Sides of the Table

If they raise a bunch of capital little ole you isn’t going to be around to have your option pool topped up. There is a telltale sign of an inexperienced startup entrepreneur. They get premature merge elation.

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When The VC Asks: About Your Hiring Plan

Hunter Walker

For an investor this can be a red flag unless you have proven experience building up high quality team quickly or clear access to large talent pools that will want to work with you for some reason (the tech is so cool; you’ve got brand heat; etc). Building a senior team but pushing back on having a healthy employee option pool? “Growing the team” is almost always one of the ways entrepreneurs utilize new investment dollars.

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Stock options: Guard the Gold

Berkonomics

Use stock options and warrants to pay for service only rarely. Earlier, I stated that stock options are the currency of early stage business. Such service providers as web designers, public relations firms, even venture banks granting loans, often offer higher value services for a lesser amount of cash and some amount of stock options or warrants (written promises to sell stock at a set price for a future period in time).

10 Steps to Success With Angel Investors

Business Plan Blog

Raising funds from business angels may be difficult, time consuming and even frustrating but for the right founder with the right project it may be the preferred option. A capitalization table showing the post-investment ownership structure of the business to include founders, option pool and investors in the current round. 10 Steps to Success With Angel Investors.