Remind VCs the Option Pool Does Not Need to Be 20 Percent

Founders - reminder that if you're raising a seed round and the VC says your employee option pool needs to be 20%, you can gently push back.

As funding for early-stage startups continues to move towards SAFEs, even beyond the first fundraise, the employee option pool becomes a significant dilution factor.

So it's not surprising why VCs would push for a larger pool (before completing the round): it saves them from some dilution! But 20% is almost always too large a reserve for a company at this stage. Here's some data from 32,922 cap tables on Carta that shows the median for seed-stage valuations is 14.5%.

(I actually think that may also be a little high, but that's the data as of today).

If you're building a tech startup here in Silicon Valley, your initial employee structure may look something like:

𝗘𝘅𝗮𝗺𝗽𝗹𝗲: 𝗲𝗺𝗽𝗹𝗼𝘆𝗲𝗲 𝗲𝗾𝘂𝗶𝘁𝘆 𝗳𝗼𝗿 𝗳𝗶𝗿𝘀𝘁 𝟱 𝗵𝗶𝗿𝗲𝘀

Hire 1 - 2% equity (fully diluted company ownership, usually granted as an ISO, 4-year full amount) Hire 2 - 0.85% Hire 3 - 0.5% Hire 4 - 0.44% Hire 5 - 0.31%

First 5 Hires = 4.1% total equity "burn"

Especially with seed-stage startups growing headcount at a much slower pace than in prior years, the option pool should reflect the hiring needs of the next 2 years or so, with a little wiggle room. You can replenish the pool at the next fundraise as needed.

Obviously I still advocate for employees to be given generous equity grants - they're the bedrock of company success! But founders can do that while also minimizing their own dilution just starting out.

The structure of the grants makes a significant difference as well. What's the exercise type (early or standard)? What's the post-termination exercise period? Are they double or single trigger? Do you plan to have periodic liquidity events? It all matters for turning equity into real wealth down the road.

#startups #founders #optionpool #employeeoptionpool

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