HQQA046 What ESOP is left?

What ESOP is left? – You’ve seen this before

Here’s what they mean…

This is a rose by any other name to two questions we have covered. I’m just covering it so you are totally covered.

When faced with the question; “What ESOP is left?”, Investors want to know how big of an ESOP they need to ask you to swallow before they invest.

What does ‘left’ mean? It assumes you have reserved a pool of shares for staff and over the past year or so you have hired more people, or issue more options for staff. So literally how much of the pool is left to allocate?

If the amount ‘left’ is not adequate you are going to have to create a larger pool. This will be done before investors invest so that the new investors are not diluted.

You do not want to have a larger pool than you need till your next round of financing (say 18 months). Why? Because your valuation goes up over time, so you want to take on as little dilution as possible the younger your startup is. If you only need to issue 5%, don’t accept 15%!

Tell investors how much was allocated, how much was issued and what is left. Then tell them what your hiring plan is for your runway, who you plan on issuing it to and finally if you plan on making the pool larger.

You could add that you plan on increasing the allocated ESOP from 10% to 12% out of the pre. The more confident you are here, the less likely you are to be messed with.

It’s worth knowing what the option pool shuffle is. It’s a trick some investors use to decrease your effective pre-money valuation by getting you to issue more shares to the ESOP than needed.

What you need to say

“We have issued 3% out of the authorised 10%. We have a hiring plan to issue 4% more this round, so we are covered for the next 18 months.”