Employees · Founder equity

Do investors want you to set aside a large pool of equity for early employees?

Puneet Prashar HR Executive at Mobile Programming

April 26th, 2017

Was thinking about this the other day. I think most founders want to set aside from equity that they can give to early employees both to compensate for a smaller salary and to incentivize those employees to help the company grow. That being said, will investors take action if they feel the pool is too large and can either dilute their stake or leave too little room for follow-on capital raises?

Gopi Mattel General Partner. Lifeboat Ventures

April 26th, 2017

Yes they do. They want this set-aside because they don't want their own stake in the company diluted in the future. Of course, this means the early founders stake is what is getting diluted as employees are hired. There are many similar protections for investors.

Dane Madsen Organizational and Operational Strategy Consultant

April 26th, 2017

The general expectation is 20%. This will happen prior to the investment so it does not dilute them. Both points are negotiable.

Selvan Rajan

Last updated on April 27th, 2017

What we have done is that we calculated the required shares to be allocated to the future employees by calculating how many we were going to hire in the next 12 months period. Here the assumption is the next round of funding would happen in 12 months.

This way, you allocate what you need not more than that, which will dilute existing shareholders only enough. When you need more shares, you can always add more when there is a need. Without doing this basic homework, if you allocate arbitrary numbers like 15% or 20% etc., you will dilute too much.

Mike Moyer

April 27th, 2017

Yes, but it's silly.

Think about it. If you authorize 10 shares and you set 2 aside and issue 8 then 8 shares represents 100% of the equity. You can't issue shares to nobody (double-negative intended).

What this really means is they want additional shares to dilute the founders before diluting the investors up to an arbitrary amount.

I never understood why people play these games. It's ridiculous.

Better just to negotiate the price of the shares to accommodate the additional equity awards.

So, sell the investor enough shares so when the extra shares are issued he will be at his desired percentage. If you never issue the shares you won't have to dilute at all.

"Setting aside" x% of shares implies that you can predict the future. Nobody can. Keep it real.

That being said, if the deal depends on this fantasy and you're comfortable with it, go for it. It's easy to document.