Option Pool Shuffling for Startups

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Creative Commons License photo credit: woodleywonderworks

Option pool can be described as the amount of a startup’s common stock reserved for employees, directors, advisors, and consultants. The stock reserved is then issued to the aforementioned stakeholders. It is through a written plan a startup pre-authorizes the amount of the company’s common stock which will be issued by the administrator (usually the startup’s board of directors or a committee selected by the board). A startup, for example, can have 5,000,000 shares of common stock but only elect to authorize 2,000,000 shares.

A startup’s original option pool may not likely turn out to be the last option pool the startup creates. The size of the pool should be discussed at each round of funding and financing, since at that time, the startup might need more equity options to attract and motivate future hiring.

The confusing part of an option pool is how the option pool’s non-issued or unissued portion is treated.

We suggest you read this post for a detailed insight into Option Pool Shuffling

Summary: Don’t let your investors determine the size of the option pool for you. Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation.

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