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Some details regarding my company: I started off as a single-founder bootstrapped company (100%-owned). Later I brought in two co-founders at 20% equity each.

So equity split was:

Myself - 60%

Cofounder1 - 20%

Cofounder2 - 20%

I now wish to setup an options pool. Since I don't want to dilute my cofounders I dilute myself by 20% and put it as an option pool.

Equity table now becomes:

Myself - 40%

Cofounder1 - 20%

Cofounder2 - 20%

Options pool - 20%

So my question is this: What happens to the unused option pool (say only 5% of it was assigned and 15% of it is still remaining) at point of exit, say an acquisition? Can I put in a clause that states that the unused 15% will be transferred to me?

jd

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2 Answers

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Option pools are normally allocated at the start of the business. This means options exercised dilute all shares. It is not uncommon to authorize additional shares for an option pool which, when exercised, dilute all shares. And the first responder is correct that your scheme is flawed. Everyone should get diluted to set up the option pool.

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An option only turns into stock when it's exercised. It is an option to buy stock in the future at a price determined now. Only when that buy occurs does the underlying stock come into being and the dilution occur.

Your "option pool" concept seems weird/flawed. It also doesn't help that you are paying (with your own equity) for the benefits that the option scheme brings to [all] the firm [shareholders]. The employee incentives that the option scheme brings are funded by you but benefit everyone -- this doesn't seem fair.

I'd be very concerned if my fellow shareholders expected me to take a dilution on my stake without them taking the same hit.

Rather, it should work like this:

You have, say 100 shares at the start, divvied up as 60 : 20 : 20.

You issue a pool of options, say, 100 options, each for one share. The equity split is still 60 : 20 : 20 as issuing options does not create stock (nor dilute holdings).

Say the options vest in 5 years and, of the 100 options issued, 20% are exercised.

This means that your equity split now looks like 60/120 : 20/120 : 20/120 : 20/120 ...

...which works out to 50% : 16.7% : 16.7% : 16.7% which shows that you and the 2 other founders all dilute in equal proportion based on the number of stocks that need to be created to service the options.

Un-exercised options simply expire without having any dilutory effect.

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