When first-time entrepreneurs set out to raise money, they often consider the tradeoffs of getting on the funding treadmill vs continuing to bootstrap. Once they think the fundraising route is the way to go, I like to recommend they plug the fundraising math in a spreadsheet and see what the different outcomes might look like (e.g. the valuation multiplier to raise money is 5x). Only, this is where many entrepreneurs don’t understand the option pool shuffle.
Entrepreneurs need to factor in an additional 10 – 15% dilution for each round of funding for new employee stock option pools.
As part of the pitch to raise money, there’s always the goal to hire X number of new people. Well, to hire those people it requires equity, and the more talented the people, the more equity that’s required. Investors typically want the startup to create a new option pool as part of the financing event.
Entrepreneurs would do well to factor in 10 – 15% more dilution for each round of funding when analyzing fundraising options.
What else? What are some more thoughts on the idea that many entrepreneurs don’t think through employee option pools when raising money?