Corporate & Securities Law

What Happens to the Option Pool if a Startup is Acquired?

By Ryan Roberts

The option pool is the amount of common stock a startup reserves (typically at each series of financing) for future issuances to employees, directors, advisors, and consultants.

For example, if a startup has 5,000,000 shares of common stock outstanding immediately before the Series A round, a condition of the Series A round may will be the creation of an option pool, likely in the 10-20% range of the post-financing fully-diluted capitalization.

At the Series A round, the option pool only dilutes the founders and not the new investors, since the option pool is put into the pre-money. The higher the percentage, the greater the dilutive effect for the founders.

After the Series A round, as the startup develops and adds human capital, it will use the option pool reserve to provide equity compensation to such hires.

If the startup gets acquired, what happens to the unissued amount left in the the startup’s option pool ?

The answer is pretty intuitive — the unissued options get wiped out. But this is still probably a relief to some founders, since founders suffer a dilutive effect from the entire option pool when raising capital.

Full post as published by The Startup Lawyer on December 22, 2009 (boomark / email).