VCs will take the position that all of the shares issuable upon the conversion of the bridge note and any warrants granted will be part of the denominator for calculating the price per share of the Series A. We need serise but he doesn't want to be an employee or board member. Many factors affect option allocations including the quality of the existing team, the size of the opportunity, and the experience of the new hire. No regular federal income tax is recognized upon exercise of an ISO, while ordinary income is recognized upon exercise of an NSO based on the excess, if any, optiohs the fair market value of the shares on the date of exercise over the exercise price. The Option Pool Shuffle. What you are proposing is rational, but that is not the way it is done. Raghavan — I would just issue and sell common stock to him at the same price as other founders.
Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation. Your teammates ask what their shares are worth. Proper respect must go out to the brainiac who invented the option pool shuffle. Putting the option pool in the pre-money benefits the investors in three different ways! First, the option pool only dilutes the common stockholders. If it signaux forex out of the post-money, the option pool would dilute the common and preferred shareholders proportionally.
Second, the option pool eats into the pre-money more than it would seem. It seems smaller than it is because it is expressed as a percentage of the post-money even though it is allocated from the pre-money. This reverse dilution benefits all classes of stock proportionally even though the common stock holders paid for all of the initial dilution in the first place!
More likely, you will raise a Series B before you sell the company. In that case, you and the Series A investors will have to play option pool shuffle against the Series B investors. However, all the unused options that you paid for in the Series A will go into the Series B option pool. This allows your existing investors to avoid playing the game and, once again, avoid dilution at your expense.
You can beat the game by creating the smallest option pool possible. Add up the options you need to give to the new hires. Option grants go down as the company gets closer to its Series B, starts making money, and otherwise reduces risk. The top end of these ranges are for proven elite contributors. Most option grants are near the bottom of the ranges. Many factors affect option allocations including the quality of the existing team, the size of the opportunity, and the experience of the new hire.
Discuss your hiring plan with your prospective investors before you discuss valuation and the option pool. Put the option pool in the post-money instead of the pre-money. This benefits you and your investors because it aligns your interests with respect to the hiring plan and the size of the option pool. When your opponent has different norms than you do, you either have to attack his norms or ask for an exception based on the facts of your case.
Both straits are difficult to navigate. Fancy negotiators call this normative leverage. You apply normative leverage in the option pool shuffle by using a hiring plan to justify a small option pool. While the above is presented as a somewhat combativitve strategy, I think the result of using the above and focusing on the hiring plan result in both the VC and the Entrepreneurs feeling better about the post-deal plan. If a VC is asking for an inordinate amount of diligence and meetings, forget them and move on.
If you need to get in touch with people who can decide quickly even if the decision is nodrop me a note at myfirstname at mylastname dot com. Do you mean the shares go to the founders? That does work if the company gets sold before another round of financing. But if you do another round of financing first, those unallocated shares will go into a new option pool.
This allows your existing investors to avoid playing option pool shuffle against any new investors and avoid dilution at your expense. The key is to reframe the discussion in a manner that gets to the core motivations of different parties. But they are never going to admit to that. So you sometimes have to reframe the parameters of the discussion, which is exactly what you guys suggest in your article. My suggestion was just another way of doing basically the same thing if people still face objections after the bottoms-up rationalization you advise.
What if the founder already included an option pool in the existing shares outstanding? My understanding is in your scenario, new shares had to be issued, but not in my scenario. But, this is basically just semantics. My question is — what if you are still fluid in terms of how much money you are raising for your Series A. Any thoughts on how to have a raise-independent approach?
Make a hiring plan that is consistent with the amount of money you are asking for. If you end up raising more money, your investors may or may not ask you to revise the hiring plan before the financing. In theory, you should be able to issue fewer shares to new employees because the share price is higher.
So you pre series a stock options be able to get away with a smaller option pool. However, in practice, options for new employees tend to be calculated as a percentage of post-money, not as a total share value. Remember, more fully-diluted shares outstanding drives the Series A price per share down, resulting in more dilution to the founders. Given that many companies are doing convertible note bridge financings as their seed round, this seems to come up relatively often. VCs will take the position that all of the shares issuable upon the conversion of the bridge note and any warrants granted will be part of the denominator for calculating the price per share of the Series A.
At first glance, it seems like there is a good argument on behalf of the company that the shares issuable upon the bridge note are no different from shares issued in the Series A, and should not be included in the pre-money fully-diluted shares outstanding. In addition, warrants issued in connection with the note typically have an exercise price equal to the Series A price, so these warrants are not dilutive like cheap founders common shares.
Typical disclaimers about legal advice apply to this comment. In our case, it was a bargaining chip used in conjunction with a decision to take slightly more money, not unlike raising the valuation to take additional funds. We were given the choice of doing that or upping the premoney full-diluted. I think founders get founding shares for forming the idea, pulling a company together, and creating value. Then they play roles that otherwise would cost dilution to shareholders through options.
Replacement of the founders in their respective roles also creates dilution to shareholders through options. The investors will tell you that the company needs a large option pool. The debate is really about who pays for the option pool. VentureHacks has a relevant article. We have two choices:. Allocate an option pool that will be pre series a stock options hiring options strategies tradeking up to the next round Which dilutes the founder less?
My intuition says that the second option is better because the early investors are diluted along with the founders during the creation of the new option pools. Don't blow up your Series A term sheet by over-optimizing terms A View from the Valley. Much information is available on the web. Make sure you understand the effect of including the option pool in the pre-money valuation.
Think about alternatives to simply changing the valuation, such as using […]. Stock Plans: Give the People What They Want. And no prizes for guessing which side of the table really understands the right answer. When bringing in a CEO on board in a Non Fundedprerevenue generating company which is ready to launch after a year plus of product development do you give options or common stock? I sincerely appreciate the resources you all have made available for entrepreneurs through VentureHacks.
This article brings up a question for me: Since shares are vested…. How to Evaluate an Offer from a Startup Incubator Startup Lawyer. For public companies The value of a company pre series a stock options significantly tied to growth, because the current stock price reflects what investors anticipate futu…. Good advice for startups. The Option Pool Shuffle.
Adam, let them chase you a little bit too. If you need to get in touch with people who can decide quickly even if the decision is nodrop me a note at myfirstname at mylastname dot com Reply. Hi Deva, Thanks for the comment. This is another case of investors looking one step ahead of the entrepreneur. I meant create a device such that the cancelled shares get allocated back pro-rata to common shareholders. As you know, it all really comes down to the investor wanting to limit his dilution in future rounds by having an option pool that will not need to be topped up much in future rounds.
The option pool raised a question for me, if you could kindly comment. This is very helpful. Here is my suggestion. We were able to get our bridge note shares not included as part of the premoney fully-diluted shares outstanding. OK…saw the chart on. The figures are post-A carbon trading system australia rough.
Charlie, you are welcome to disagree but that is not the norm. One question occurred to me after reading your article, if you could kindly shed some light on it. What you are proposing is rational, but that is not the way it is done. Allocate an option pool that will be cover hiring only up to the next round. Which dilutes the founder less? Got a spreadsheet that models multiple rounds of funding and option pool creation?
Think about alternatives to simply motilal oswal options brokerage charges the valuation, such as using […] Reply. That would be very helpful. Nivi pre series a stock options Naval, found your article helpful. Will appreciate your comments. This is a great post. Any advice is greatly appreciated. Why are companies always chasing growth? The answer is different for public companies, startups, small businesses, family businesses, and so on.
For public companies The value of a company is significantly tied to growth, because the current stock price reflects what investors anticipate futu… Reply. Venture Hacks on Facebook.
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What’s the difference between an ISO and an NSO? Non-qualified stock options (“NSOs”) can We are pre - series A financing so would like to issue $ based.
Option series: read the definition of Option series and other financial and investing terms in the oparty.ru Financial Glossary.