The Option Pool Shuffle Pt. 1

(Credit where credit’s due – this post was inspired, in large part, by an excellent and still relevant post available at Venture Hacks.)

For this inaugural, two-part, blog entry I thought it appropriate to start with a topic near and dear to my heart, and to those of others involved in the startup world – the “option pool shuffle”. Every few months I find myself explaining to a client or friend exactly how venture capital entities (“VCs”) would like to “help” you structure your startup’s employee stock option plan (“ESOP”).

Broadly speaking, you can go one of two routes – VC friendly or founder friendly.

The VC friendly approach provides the VC with a greater share of the company. The share options are allocated first, and then the VC is allocated its shares. The impact is that the VC share allocation dilutes the share option pool and the VC ends up with a greater percentage of the company.

The founder friendly approach gives the VC a smaller share of the company. The VC is allocated its shares first. The impact is that the VC is diluted by the new share option pool, consequently the VC ends up with a smaller percentage of the company.

We’ll examine the ramifications of each type of plan in our next post. Which I’m sure you’ll all await with bated breath.