4 ms·

>No option pool. Taking the option pool out of the pre-money valuation (ie, diluting only founders and not investors for future hires) is just a way to artific

>No option pool. Taking the option pool out of the pre-money valuation (ie, diluting only founders and not investors for future hires) is just a way to artificially manipulate valuation. New hires benefit everyone and should dilute everyone. This is my favorite part. For example if you have an early exits and don't use the pool the founder still is diluted for shares never optioned.

andrewfong 13y ago
A side benefit of removing the pool is simplifying the math. A common way for investors and lawyers to model the fixed option pool is to use an Excel spreadsheet with circular references, which results in unstable numbers and all sorts of confusion later. Or to frame it more generally, complexity increases transaction costs.
- nissimk 13y ago
  It's more complicated than that. Complexity is almost always more risky for the founders than the investors because of information asymmetry. Because the investors do a lot of deals, they understand all of the implications and side effects of each term. The founders, even with good advisers and attorneys will likely have trouble understanding the implications of complex terms. This is a classic wall street scam where the bank presents complex terms in the guise of sophisticated banking but it's really just a sneaky way to screw the customer. It's always good to reduce the complexity in agreements because valuing options is very difficult without experience.
  - harryh 13y ago
    If you don't understand the complexities of an option pool (either pre or post money) you are dumb and have no business starting a company.
- crapshoot101 13y ago
  don't need to do that all - its actually basically a very simple model without the circular reference.
- harryh 13y ago
  > A common way for investors and lawyers to model the > fixed option pool is to use an Excel spreadsheet with > circular references Huh? That makes no sense.
  - andrewfong 13y ago
    Here's how the model often works (not saying it's a good idea, but pretty common): Pool increase => total number of shares => price per share (because the valuation is fixed) => number of shares investor is getting => pool increase necessary to maintain a fixed percentage.
    - harryh 13y ago
      None of that should result in circular references on a spreadsheet. Incidentally, this SS makes it clear that you are negotiating over essentially 3 numbers (as price per share doesn't matter) in a first investment. And those #s don't change with whether the option pool is created pre or post investment, that just changes how you talk about them a bit. EDIT: See, like this https://docs.google.com/spreadsheet/ccc?key=0AjHAG0M-0vxXdGtSVFZtZHRPRl9nNENIOHFYemlad1E#gid=0 https://docs.google.com/spreadsheet/ccc?key=0AjHAG0M-0vxXdGt...
      - andrewfong 13y ago
        I don't quite understand your spreadsheet. Founder shares are usually purchased well before the investment, but here you're calculating them as a function of the total number of shares. Because the number of founder shares is already established, price per share absolutely matters. EDIT: That is, price per share isn't an independent variable (it can be calculated as a function of the other variables) -- but it can't be arbitrarily set.
        harryh 13y ago
        There are two scenarios: 1) The founders haven't been working especially long on the company and haven't incorporated (maybe they have an LLC, but not a C Corp). In this case it actually is pretty common for the # of founder shares to be set at the time of investment. Founders pay far less (really just a token amount like $.01) than investors. In this case the price per share is independent (and kind of meaningless. Do you want 3.5M shares worth $1 each, or 35M shares worth $.10 each. Though there are psychological norms people tend to stick to). 2) The founders have been working on the company for a while and incorporated well before taking investment. This is the scenario you describe. I added a 2nd sheet ("scenario 2") to cover this case. As you can see it also contains no circular references. As you said price per share is no longer arbitrary here as it's fixed by the # of founder shares created pre-funding. Sometimes you might do a split (or reverse split) here to adjust the price per share to the same psychological norms as above.

andrewfong 13y ago

A side benefit of removing the pool is simplifying the math. A common way for investors and lawyers to model the fixed option pool is to use an Excel spreadsheet with circular references, which results in unstable numbers and all sorts of confusion later. Or to frame it more generally, complexity increases transaction costs.

nissimk 13y ago
It's more complicated than that. Complexity is almost always more risky for the founders than the investors because of information asymmetry. Because the investors do a lot of deals, they understand all of the implications and side effects of each term. The founders, even with good advisers and attorneys will likely have trouble understanding the implications of complex terms. This is a classic wall street scam where the bank presents complex terms in the guise of sophisticated banking but it's really just a sneaky way to screw the customer. It's always good to reduce the complexity in agreements because valuing options is very difficult without experience.
- harryh 13y ago
  If you don't understand the complexities of an option pool (either pre or post money) you are dumb and have no business starting a company.
crapshoot101 13y ago
don't need to do that all - its actually basically a very simple model without the circular reference.
harryh 13y ago
> A common way for investors and lawyers to model the > fixed option pool is to use an Excel spreadsheet with > circular references Huh? That makes no sense.
- andrewfong 13y ago
  Here's how the model often works (not saying it's a good idea, but pretty common): Pool increase => total number of shares => price per share (because the valuation is fixed) => number of shares investor is getting => pool increase necessary to maintain a fixed percentage.
  - harryh 13y ago
    None of that should result in circular references on a spreadsheet. Incidentally, this SS makes it clear that you are negotiating over essentially 3 numbers (as price per share doesn't matter) in a first investment. And those #s don't change with whether the option pool is created pre or post investment, that just changes how you talk about them a bit. EDIT: See, like this https://docs.google.com/spreadsheet/ccc?key=0AjHAG0M-0vxXdGtSVFZtZHRPRl9nNENIOHFYemlad1E#gid=0 https://docs.google.com/spreadsheet/ccc?key=0AjHAG0M-0vxXdGt...
    - andrewfong 13y ago
      I don't quite understand your spreadsheet. Founder shares are usually purchased well before the investment, but here you're calculating them as a function of the total number of shares. Because the number of founder shares is already established, price per share absolutely matters. EDIT: That is, price per share isn't an independent variable (it can be calculated as a function of the other variables) -- but it can't be arbitrarily set.
      - harryh 13y ago
        There are two scenarios: 1) The founders haven't been working especially long on the company and haven't incorporated (maybe they have an LLC, but not a C Corp). In this case it actually is pretty common for the # of founder shares to be set at the time of investment. Founders pay far less (really just a token amount like $.01) than investors. In this case the price per share is independent (and kind of meaningless. Do you want 3.5M shares worth $1 each, or 35M shares worth $.10 each. Though there are psychological norms people tend to stick to). 2) The founders have been working on the company for a while and incorporated well before taking investment. This is the scenario you describe. I added a 2nd sheet ("scenario 2") to cover this case. As you can see it also contains no circular references. As you said price per share is no longer arbitrary here as it's fixed by the # of founder shares created pre-funding. Sometimes you might do a split (or reverse split) here to adjust the price per share to the same psychological norms as above.