Generally, when a company receives a term sheet from a potential investor, that term sheet will include a requirement that an option pool be created or “refreshed”. Investors will also generally ask that the shares available under the option pool be included in the pre-money valuation, which effectively lowers the price per share in a financing and means that the current stockholders (usually the founders) are diluted by the pool while new investors are not diluted.
Founders absolutely can negotiate the available option pool. Investors will want the available option pool to be higher so that they are not diluted if a company needs to increase the available pool after the investors invest. We generally see a range from 10-20%. However, the company should negotiate the available pool by taking the following into consideration:
- How long will this financing last the company?
- How many key employees does the company plan to hire in that timeframe?
- What number of options does the Company think it will need to grant to key hires in order to be competitive?
Based on the answers to the above, the company can negotiate a lower available option pool if, for example, the funds from the financing are projected to last for 18 months and the Company has already made its key hires and does not plan to hire additional key employees for the next 18 months.