Secrets of Sand Hill Road by Scott Kupor & Eric Ries

Author:Scott Kupor & Eric Ries
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2019-06-03T16:00:00+00:00

Capitalization

Notice here that VCF1 says that the valuation of the company includes the unallocated employee option pool—in this case, 15 percent. As we talked about before, VCF1 wants to make sure that it gets its 20 percent ownership after all is said and done, so it doesn’t want the creation of the option pool to dilute its ownership.

How did VCF1 come up with 15 percent as the right pool size? Honestly, this is just a negotiation between the VC and the company CEO, but a good rule of thumb is that the option pool should be sufficient to handle the expected employee hiring until the next round of financing. So the VCs often ask the CEO to generate a head-count growth plan for the next twelve to eighteen months (the likely time frame until the company pursues another financing round) and estimate how much stock is required to grant to those planned hires.

The CEO would like to keep the pool size as low as possible because increasing the pool size before the current financing round dilutes her (and other existing common shareholders). The VC wants to make the pool size as large as possible because if the company needs to increase the pool after she has invested her money, she will also share in the dilution. This is the dance.

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