How can a founder structure the stock options pool to get guaranteed percentage?


2

Let's say I have a company where I am the founder and also have 2 employees - E1 and E2. Let's say there are 1000 authorized shares, but only 800 of them are issued. 600 of those shares are assigned to me and 200 of shares are for the stock options pool.

Now my goal is to make sure that during the acquisition:

  • E1 gets 5% of the company
  • E2 gets 1% of the company
  • If there's ever Employee N - he/she get M% of the company
  • I get the rest. For example, if there are still only E1 and E2, I should get 94%.

How do I do that? From what I understand, if the remaining stock options pool is unassigned at the time of acquisition, the percentages will be very different?

Co-Founder Founder Incorporation Stock Options Shares

asked Oct 8 '13 at 04:45
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Salmon
970 points

2 Answers


1

You're approaching things in a non-conventional way, where it sounds like you are focused on "what percentage do I hold": you would be better off taking the conventional approach, where the goal is to create the most value for yourself (if the company gets valuable, and you hold a slightly smaller percentage of a much bigger pie, isn't that best).

The standard way to do things is:

  1. As a founder, you can buy shares at the founding price (e.g., $0.001/share, or $1,000 for 1,000,000 shares) rather than take options. The reason people take options instead of shares is for tax reasons: once you have taken outside money into the company, the shares have a real value, and giving someone 5% of your shares may be the same as giving them $50,000, on which they have to pay tax. At the beginning you are (1) buying them (2) for pennies, so there are no concerns. Shares also give you added rights under common law, which you don't get if you hold options.
  2. Now that you have issued shares, every new person gets options. Yes, you get diluted down every time you give options to someone. And the reality is that every new person you add to the team makes your company more valuable. Hopefully the person adds a lot more value than the percent of the company you give them, remember to do vesting just in case they don't work out. See my blog post for more on that.

Note that since you got founder shares, you have a very high percentage of the company already. It is conventional to limit options to at most 10-20% of the shares outstanding. Since you will already have 80%+ of the shares outstanding, and you should be on a vesting program yourself where you earn those shares (typically over 4 years), you typically don't give founders any options. You already own 10-20x more shares than any other employee. You want to motivate them by giving them a piece of the action, rather than demotivating them by taking a bigger piece for yourself! Does it really matter if you own 18x more shares than every other employee or 20x the shares? If the company does well, you will do very, very well!!

I know this isn't the answer you asked for ... and this is my advice on how to do things.

answered Oct 15 '13 at 02:42
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Kamal Hassan
1,285 points
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0

THIS IS NOT LEGAL ADVICE - JUST MY VIEW ON THE SITUATION

As far as I understand since 1000 shares are authorized, that represents 100% equity

Now since only 800 are issued, that would mean you only have shares authorized for 80% of the company

If your option pool is say 20% it should be 200 shares, and you own 800. As a private company there is no need to authorize more shares than you issue since you are personnaly holding all of them. Any dilution will come from your funds, unless otherwise agreed.

So with that said, if your employees hold 6% so far, you hold 94%. If you hire another person or take equity investment, your 94% will be diluted by whatever share you issue the. At the time of sale you will own 94% if your current situation remains same.

answered Oct 15 '13 at 01:28
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User60812
820 points

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