The Option Pool Shuffle

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.

Trending Sources

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.

Comparing valuations between rounds

The Equity Kicker

A few of them have done good up rounds and the easiest way to describe the magnitude is to talk about the valuation multiple. As a refresher, the post-money valuation is calculated as the pre-money valuation plus the amount of money invested.).

Quick Post on Post-Money Valuations

Rob Go

When I first started out as a VC nearly 9 years ago, most early stage company valuations were expressed as pre-money valuations. That is, the valuation of the company prior to the investment of new capital. The post Quick Post on Post-Money Valuations appeared first on ROBGO.ORG.

What is it Like to Negotiate a VC Round?

Both Sides of the Table

In the old days VCs funded off of a “pre-money” valuation. If you add the pre-money valuation (let’s say $8 million) to the amount of money you’re raising (let’s say $2 million) you get the post-money valuation. So deals were either “one handed” (one VC) or “two handed” (two VCs) and were discussed as “$5 on $20″ which meant $5 million on a $20 million pre-money valuation. How much is in the option pool?

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. Since Homebrew typically leads/co-leads seed rounds, we assist in helping founders design and manage their pool against their hiring forecast.

Equity for Early Employees in Early Stage Startups


If the company's valuation is $2 million, $90k is 4.5%. Of course, to be able to use this kind of formula, you will need to be able to determine how much impact the person will have and figure out a valuation.

Unintended Consequences: When SAFE and Convertible Notes Go Awry

Pascal's View

This is a fundamental issue that does, indeed, boil down to understanding the post-money valuation of a company. At its core, this issue points to the lack of understanding about the importance of post-money valuation by both entrepreneurs and investors. The most serious unintended consequence occurs from “note waterfalls”— converting multiple notes that have multiple valuation caps.

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.

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.

Should I Use My Investor’s Lawyer?

Scott Edward Walker

At what valuation and on what terms? 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.

How to Evaluate an Offer from a Startup Incubator

The Startup Lawyer

The following are some issues to consider and actions to take before accepting an incubator’s offer: (1) Calculate Valuation and Determine Value. Pre-money valuations startups receive from incubators are typically low…really low. If an incubator offers your startup $25,000 in exchange for 6% equity, the pre-money valuation is a whopping $391,667. As you can see, I don’t think any startup has joined an incubator based solely on the pre-money valuation.

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


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.

Term Sheet Negotiation Tells

Permanent Record

The investor who spends hours browbeating you to avoid a tiny reduction in the option pool will also be tying up board meetings for an hour to talk about an assumption on line 18 of the revenue model submitted for discussion. Does he wait until the day of close and then call you and tell you that he found out you have a competitor and is going to lower the valuation by 30% now that you are in a lockup?

Is it Time for You to Earn or to Learn?

Both Sides of the Table

Let’s assume that the company raised it at a normal VC valuation, which means it gave up 33% of the company and thus $5 million / 33% = $15 million post-money valuation. Stock options are the icing on the cake. Don’t join for the options.&#.

Using warrants to pump up your VC valuation

How to pump up your VC valuation. Let’s say you receive a term sheet for a $1 million investment at a $3 million fully diluted pre-money valuation, and you’re kind of disappointed. Option Pool. Option Pool.

Viva La Revolucion! AngelList goes into Hyperdrive

Fred Destin

Some VentureHacks posts are today mentioned like religious scriptures by entrepreneurs, such as Nivi''s 2007 Option Pool Shuffle. The first of many information products : valuation graphs. Viva La Revolucion !

Building Convertible Debt into the Premoney Valuation


One interesting point that comes up a lot is how to factor the convertible debt into the premoney valuation of the Series A round. 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). I am going to ignore any valuation cap feature. Series A premoney valuation negotiated to be $3mm.

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 kinda sucks to be engineer #1.”.

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. Pre-money valuation. 10 Steps to Success With Angel Investors.

Raising Funding From Family and Friends: Division of Equity

Business Plan Blog

It can be difficult to give away a piece of your “baby”, and this early in the startup stage it is almost impossible to determine the valuation to your company. You have looked at the advantages and disadvantages, and have decided it is the best option for your startup.

5 Tips for Raising a Venture Round

This includes things like how liquidation preferences impact future rounds and ultimate liquidity, to why VCs ask to expand an option pool before investing as part of their term sheet.

Angel Investing at Today's Market Rates is a Losing Proposition


A few weeks back, I wrote a post entitled The Tweetstorm that Spawned the 10,000X Startup where Dave McClure of 500startups lamented about the state of early stage, that valuations were way too high, and that early stage investors will lose money.

Term-sheets and Valuations: Thinking about Negotiations - Startups.

Tim Keane

Term-sheets and Valuations: Thinking about Negotiations.   I’ve sat down with entrepreneurs and a copy of a term sheet guide I like [ “Term Sheets & Valuations - A Line by Line Look at the Intricacies of Venture Capital Term Sheets & Valuations ” by Alex Wilmerding, Aspatore Press.] The Valuation Question.   You can vary both valuation and term-sheet assumptions (in the gray boxes) to assess the impact on the values of the business.

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

Seeing Both Sides

Entrepreneurs often mistakenly focus solely on the pre-money valuation while VCs look at multiple knobs in the negotiation to drive to a set of terms that, in total, they find acceptable. The first, and most focused on, is something called the pre-money valuation. This pre-money valuation is own known in shorthand as “the pre” and you will hear entrepreneurs and VCs discussing other company finances using this term (“You were able to raise money at a $9 pre?

How to Divide Equity to Startup Founders, Advisors, and Employees

Chris Dixon wrote a blog post about “ The one number you should know about your equity grant “ The one number you should know about your equity grant is the percent of the company you are being granted (in options, shares, whatever – it doesn’t matter – just the % matters).

Cap Table Clean Up


The share price is calculated by taking the pre-money valuation and dividing it by the number of shares outstanding pre-money. So Share Price (SP) = Pre-Money Valuation (PMV) / Shares Outstanding (SO). 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.

How to Fund a Startup

Ifyour competitors offer employees stock options that might make themrich, while you make it clear you plan to stay private, yourcompetitors will get the best people. Another concept we need to introduce now is valuation. I say "in theory" because in early stageinvesting, valuations are voodoo. As a company gets more established,its valuation gets closer to an actual market value. Startups valuations aresupposed to rise over time. Want to start a startup?

Most Common Early Start-up Mistakes

Both Sides of the Table

Assuming normal valuations at fund raising rounds you’ll be down to 6-12% after you’ve created a stock-option pool and raised capital. But these people seldom make retirement money from the stock options on these companies. They’ll happily join for 5% or less and they’ll have options and not stock.

IP 82

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.

Anatomy of a Term Sheet: Conversion and Anti-dilution

VC Ready Blog

Optional Conversion and Mandatory Conversion. Preferred stock typically converts to common stock either: (a) at the option of the stockholder (“Optional Conversion”); or. (b) Weighted average anti-dilution may be either “broad” or “narrow” depending on whether certain derivative securities (such as options and warrants) are included in the calculation of the company’s existing capital, with a “broad” formula resulting in less dilution adjustment (i.e.,

5 Tips for Raising a Venture Round


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.

How does funding work? Angel & VC investment in Nordic startups by the numbers


I have seen many bad investments because of that lack of knowledge – where the funding actually inhibited the startup from getting further investments later – because it was at a valuation that was off the mark, often too low. At a € 2 million valuation, they raise € 200 000 in new money.

The New Funding Landscape

And those who do raiseVC rounds will be able to get higher valuations when they do. Ifthe best startups get 10x higher valuations when they raise seriesA rounds, that would cut VCs returns from winners at least tenfold. [ Most founders doing series A deals wouldprefer to take half as much money for half as much stock, and thensee what valuation they could get for the second half of the stockafter using the first half of the money to increase its value.


Chris Dixon

The most common types of derivatives are futures – the obligation to buy a security at a future date at pre-agreed upon price – and options – the right to buy something at a future date at pre-agreed upon price. Valuing options was a mystery until 1973 when the Black-Scholes model was invented. The main practical outcome of this model was the idea that the value of an option was determined mostly by the volatility of the underlying security.

Some Takeaways From Stockholm & Helsinki's Term Sheet Battle


As a general note, Creandum and Sunstone''s experience is that entrepreneurs have the tendency to get caught up in pre-money valuations and then get eaten up by a lot of "fun" clauses in the term sheet to protect the investor''s return.

How to raise money with no lead

Venture Hacks

Here’s an outline and transcript: You can close an angel round with ‘mass syndication’ Start with terms and valuation below market. How do you set your valuation? The keys are that you have to set the terms and the valuation very, very reasonably. Start with terms and valuation below market. Nivi : No option pool, really. How do you set your valuation? It’s called How do we set the valuation for a seed round?

Startup Equity For Employees

5 Stock vs Options. NOTE: If youre an attorney or tax accountant with experience helping startup employees with stock and option issues, drop me a note. The vesting terms are usually set by an "Incentive Stock Option (ISO) plan" approved by the companys Board of Directors, and are used for all employees. Stock vs Options. To actually own the stock, you have to exercise your option (as you vest), and write a check to the company for the total strike price.

Getting Funded: Step 5, The Legal Grind

Passionate Intensity

Even the valuation may be adjusted for some reason (such as letting a strategically important partner into the deal), but, you should not change the terms dramatically after the deal has gone to the attorneys.