We are in the process of refreshing our stock option plan. We are a high-tech company and I have been trying to ascertain what the appropriate overhang percentage should be. I see public high-tech companies at 15% to 20%, but it is hard to find private company information. Any suggestions? Thanks.....Ken
Private Company Option Pool Overhang
Answers
I have done this many, many times and it's a combination of a few things. I find the first thing that investors look at, because they are VERY interested in minimizing dilution, is to see how many shares you need to bridge until your next round of funding. As you know, at each round the option pool is refreshed and nobody wants to do the next round shareholders any favors if it will dilute them in the process. So question #1, how many shares do you think you'll need to get to the next round. In order to figure that out I just connect my business model to a table that shows grants for certain levels of new hires, and then runs that table against my expected new hires. In this way I build an "equity budget". Then you total that up and add a fudge factor based on what you might need. Options are something you want to do rarely and right - you don't want to be going back to the board again and again for option pool approvals.
Next up, consider whether you have any special circumstances e.g. do we have a retention problem or are we going to ask people to work for stock in lieu of pay, or do we have a bunch of key people coming up for "refresh" grants, or are we considering any senior hires, which naturally absorb a large # of shares.
Finally, get your CEO and the board (offline) in on the discussion. Sure, 20% may be a common target, but everyone has their own vision for what is the "right" size option pool and it depends on the company, its stage in life and even the industry norms. Through these discussions you may find that your board doesn't want to plan to make it to a next round, but rather wants to take smaller bites. Great - find that out up front.
And about that 15% or 20%: that is used as shorthand for "if we give that much equity up to employees we're in the ballpark". If you give up more than that, new investors will wonder why you are giving up the shop, and if you give up less than that it may look like the founders or execs are hoarding shares and thus will not be able to attract top talent.
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