Looking for advice on a legal issue. Here's what happened.
option pool shuffle diluting founders. I've been dealing with this for about 11 weeks now and the situation isn't improving.
I have already tried to resolve this directly but the other party is not cooperating.
What's the typical outcome in situations like this?
NAL, but from what I've read, you should check your state's specific laws. That said, definitely get a lawyer to look at the specifics.
Following this thread — I'm in a very similar situation. Would love to hear how it turns out.
NAL, but from what I've read, you should send a written demand. That said, definitely get a lawyer to look at the specifics.
For anyone overwhelmed by the legal process: break it into steps. (1) Gather all documents, (2) Write a timeline of events, (3) Research applicable laws, (4) Send a demand letter, (5) If no response, escalate to regulatory complaint or court. You don't have to do everything at once.
The option pool shuffle is probably the most misunderstood element of venture financing, and it disproportionately hurts first-time founders who do not understand the math. Let me explain what is actually happening here because I got burned by this in my first company and made sure to negotiate it properly in my second.
When a VC says they want a 20 percent option pool created pre-money, what they really mean is that the dilution from the option pool comes entirely out of the founders share, not out of the investors share. For example, if your pre-money valuation is 8M and the investor puts in 2M, the post-money is 10M and the investor gets 20 percent. But if they also require a 20 percent option pool pre-money, the effective pre-money valuation of the existing shares drops to 6M.
The negotiation lever you have is the size of the option pool. VCs will often request a larger pool than you actually need because it reduces their effective price per share. Push back by presenting a detailed hiring plan for the next 18 months showing exactly how many option grants you expect to make and at what levels. If your hiring plan only justifies a 12 percent pool, argue for 12 percent instead of 20 percent.
Another approach is to negotiate for the option pool to be created post-money rather than pre-money. This is less common but some founders have successfully argued for it, especially in competitive deal situations where multiple VCs are interested. The difference in founder dilution between a pre-money and post-money option pool can be several percentage points of ownership, which translates to real money at exit.