Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation. Your teammates ask what their shares are worth. Later that evening you review the term sheet from Blue Shirt. The option pool lowers your effective valuation. Proper respect must go out to the brainiac who invented the option pool shuffle. Putting the option pool in the pre-money benefits the investors in three different ways!
First, the option pool only dilutes the common stockholders. If it came out of the post-money, the option pool would dilute the common and preferred shareholders proportionally. Second, the option pool eats into the pre-money more than it would seem. It seems smaller than it is because it is expressed as a percentage of the post-money even though it is allocated from the pre-money. Third, if you sell the company before the Series B, all un-issued and un-vested options will be cancelled.
This reverse dilution benefits all classes of stock proportionally even though the common stock holders paid for all of the initial dilution in the first place! More likely, you will raise a Series B before you sell the company. In that case, you and the Series A investors will have to play option pool shuffle against the Series B investors. However, all the unused options that you paid for in the Series A will go into the Series B option pool. This allows your existing investors to avoid playing the game and, once again, avoid dilution at your expense.
Solution: Use a hiring plan to size the option pool. You can beat the game by creating the smallest option pool possible. Next, make a hiring plan for the next 12 months. Add up the options you need to give to the new hires. How do you create an option pool from a hiring plan? To allocate the option pool from the hiring plan, use these current ranges for option grants in Silicon Valley: Title.
