An Atlanta Conversation on Employee Option Pools

December 11, 2013

in Fundraising, Legal, Negotiation

An interesting twitter conversation today emerged from Paul’s initial comment below on the topic of employee option pools. I found the conversation fascinating because:  1) it’s interesting to hear people’s thoughts on employee option pools, 2) it’s even more interesting to hear it debated among Atlantans I know and respect, and 3) the twitter format forces interesting word choices (and Rob often takes the cake for good one-liners).

I do not really have much to add personally to the conversation. I’ve never raised venture capital. I’ve only ever raised convertible note rounds, and we ended up paying off the notes rather than converting them to equity. So I have no first-hand experience with the feelings that are associated with negotiating employee option pools in a term sheet.

I do have two initial background comments:

  1. To understand the debate, read what others have written about it. Fred Wilson is a good source (here and here).
  2. This whole debate centers on the way employee option pools are included in the terms of a financing round. No one is debating the goodness of granting employees options. Everyone believes that early employees should be able to have a path to participate in the equity upsides of the business.

Here is the Storified version of the conversation with selected tweets:

I think the key points in all those tweets are accurate. Summarized, the points are:

  • Employee option pools are a term that equates to lowering the price for investors. They are a knob of the negotiation.
  • There is a risk that founders do not realize the diluting effect of these pools in the term sheet. They sound so innocent.
  • Founders really do not have an excuse to not understand their term sheets. They should both learn good negotiation skills and have good legal representation.
  • Since employee option pools have such a bad rap these days, there is an associated feeling that investors attempting to use the term might be the kind that like to pull tricky maneuvers.

The debate really boils down to one’s personal perception of the investor’s attempt to include founder-diluting employee option pools into a term sheet.

It’s great to be in Atlanta and part of these interesting debates. Wonderful to see so many participants in the discussion!

What are your thoughts on employee option pools in term sheets?

 

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