This article was contributed by William W Eigner, Esq. & Brian Headman of Procopio, Cory, Hargreaves & Savitch LLP.
Reserve 10-20% Of Your Company’s Outstanding Equity For A Stock Option Plan
Equity incentives are a major form of compensation for most emerging growth and technology companies. Without them, most start-ups cannot afford critical labor, let alone a board of directors or advisors. It is critical for a start-up to consider this reality and reserve 10-20% of its outstanding equity for a stock option plan. The exact percentage is often determined on a case-by case basis. The final figure will depend on the client’s situation, including the number of employees of the company and the amount of capital that it hopes to eventually raise.
Whatever the percentage, it pays to plan ahead. Most sophisticated investors will require a stock option pool upon investment, and a company that fails to reserve a sufficient amount of equity up-front runs the risk of being forced to establish a pool at a later date that may dilute the founders’ ownership.
Check back next Monday, September 24, for Rule of Thumb No. 2: Issue Options According To Value Added And Risk Taken.