The following is from Ask The VC, where Brad Feld and Jason Mendelson of Foundry Group answer questions related to venture capital investment and startups:
Q:
When we talk about the equity percentage numbers for those directors
and other early participants, are these numbers based on the total
number of shares prior to a funding event or does the base share number
include those allocated for investors as well? As the shares for future
investors are hard to predict, I assumed that the percentage numbers we
talk about here are before any dilutions, is that right?
A: (Brad) The answer is "it depends." When we have written about equity and compensation in
previous posts, we've tried to provide some context for the stage of
the company. When we've done this, you should assume that this does not include future dilution from other rounds of investment.
However,
there are no absolute guidelines. For example, when you bring on an
outside board director, whether it is at the Series A or the Series D,
the stock option grant is usually in the 0.25% to 1.0% range. While
this is a wide range (see - there are no real rules) it gets more
complex when a director has been with the company for a while and taken
dilution from subsequent financings. For example, assume a director
joins at the Series A and gets a grant for 1% vesting over four years.
Three years later, the company has raised $30m and the directors grant
now represents 0.3% of the company. In some cases, the director would
get an additional option grant to increase his ownership percentage
(say - back up to 0.5%); in others he wouldn't. This is a function of
the board, the investors, the entrepreneurs - all based on their view
and assessment of the director's contribution.
The
same is true for employees. Most employees will take the same dilution
the founders take with subsequent financings. This is relatively easy
to deal with in the success case because the dilution is less
significant and the value of the equity continues to increase.
However, in cases where the dilution is significant (e.g. a down round
financing) employees need an "option refresh" - this is usually
negotiated in the context of one of the financings. In addition, as
employees start to reach the point where their equity is fully vested
(as they've been at the company for four or five years) there is often
a refresh option grant.
There's
no simple answer. And - any numbers we put on this blog are merely
guidelines. You mileage will vary dramatically with the situation
E-mail
del.icio.us
Technorati
Digg