What is an option pool in VC?
After all, once they have a financial stake in your company, they want your business to succeed almost as much as you do. So it’s really not a question of if you should create an option pool, but when you’ll create it.
Do I need an option pool?
You need an option pool if you’re raising venture capital for your company because venture capitalists expect an option pool as a return on their investment. If you’re starting a tech company, the talent you’re trying to attract will also expect an option pool to be part of their incentive to join.
How do you create an employee option pool?
How do you create an option pool?
- Decide which shares to issue over. Once you know how many shares you want to issue options over, you need to decide whether you will issue options over new or existing shares.
- Ensure liquidity.
- Choose a share class.
- Decide your option pool size.
- Future-proof your option pool.
- Authorisation.
What is an employee option pool?
An option pool consists of shares of stock reserved for employees of a private company. The option pool is a way of attracting talented employees to a startup company—if the employees help the company do well enough to go public, they will be compensated with stock.
What happens to employee option pool in acquisition?
In most cases, the unused shares are redistributed to all shareholders proportionate to their ownership. Remember: all unused shares in the option pool get REDISTRIBUTED EVENLY to all shareholders. So basically, your extra 1 percent means that the remaining 9 percent will fatten the pockets of your investors.
What is pre-money option pool?
Reading on, the term sheet states, “The $8 million pre-money valuation includes an option pool equal to 20\% of the post-financing fully diluted capitalization.” If you don’t keep your eyes on the option pool, your investors will slip it in the pre-money and cost you millions of dollars of effective valuation.
Who Owns option pool?
Your stock option pool is a collection of stocks reserved for employees of your company. Consisting of 10\% – 20\% ownership of your company, this pool is typically drawn from founders’ shares. Your stock option pool is a percentage of the value of your company—not a percentage of available shares.
What is an option pool and how does it work?
An option pool is a percentage of a company reserved for employees. New companies create option pools by setting aside common stock shares, and granting these shares to employees as a way to pull new talent into a startup.
Can a company have more than one option pool?
It is also possible that a company, over the course of its development and subsequent funding rounds, may establish additional option pools after the initial one is put in place. The size of the pool may be dictated or advised by the venture backers to be a portion of the pre-money or post-money valuation of the company.
Why do VCS make you top up the option pool?
In a Term Sheet, VCs generally make you “top up” the option pool to have a certain \% of availability post-closing, but they make the pre-money cap table absorb all the dilution from it. The ask will look something like this:
How do option pools dilute the founders’ share in the company?
The creation of an option pool will commonly dilute the founders’ share in the company because investors (angels and venture capitalists) often insist on it. An option pool refers to a block of company equity that has been reserved for early investors or employees of a start-up company.