Founders Raising Seed Should Push Back on 20 Percent Option Pool

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

After we released our Founder Ownership report last week I got a few DMs questioning the employee pool segment, so decided to illustrate things in greater detail.

Now, it's no surprise 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. Using 15,000+ startups that raised rounds over the past 5 years, the median seed-stage employee pool sits at 11.8%

Of course there are caveats: option pool definition is only one term in a term sheet. The amount raised, the valuation, and the option pool are all part of the same multivariate equation. So there can be trade-offs within the deal that move the pool one way or another.

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 with a little wiggle room. You can replenish the pool at the next fundraise as needed (in fact most companies only utilize 60%-70% of the pool before the next fundraise)

To be perfectly clear - I still advocate for employees to be given generous equity grants, they're the bedrock of company success after all! But founders can do that while also minimizing their own dilution in the earliest stages.

The more you know...🙏

#startups #founders #employeepool #ESOP #fundraising

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