Rules of Thumb

What the greatest technology investors say about Rules of Thumb

The VC Assumes there’s an Option Pool

Mark Suster Partner Upfront Ventures and former entrepreneur

“The VC assumes [there will be] an option pool [] to hire and retain talent to grow [the] company. [] The more senior members [the company has], then the [fewer] options [needed] and vice versa.  Industry standard post [the] first round of funding will be 15-20% [for the option pool].  [Suster] say[s] “post” funding because [one will] need more than this amount pre-funding to get to this number after funding. [] 

[It’s standard] that the VC wants the options includ[ed] before [he] funds [].”  The option pool dilutes the founder’s percent ownership, not the investor’s.  The option pool suffers the same percent dilution the founder suffers when a VC invests his money. 

“Note that the term sheet [says “Pre-Money” valuation and nowhere does] the term sheet [say] “true Pre-Money” or “effective Pre-Money”– that’s for [the founder] to calculate.”   True or effective pre-money is based on a lower price/share due to options increasing the number of shares incorporated in the calculation. The result is a lower true pre-money than pre-money, the latter which is also called “nominal” pre-money valuation.  Mark Suster Want to Know How VC’s Calculate Valuation Differently from Founders, July 22, 2010;    http://www.bothsidesofthetable.com/2010/07/22/want-to-know-how-vcs-calculate-valuation-differently-from-founders/